Establishing a real estate services corporation is an effective way of protecting both personal assets and business investments, but it involves additional expenses and requirements. Here are a few helpful guidelines to get you underway. Obtain the Best information about marketing for real estate agents.
An LLC’s articles of incorporation must limit it solely to providing real estate services requiring registration. Family members can own non-controlling shares but cannot serve as registrants or perform services on behalf of the PREC.
It is a separate legal entity.
An independent legal entity provides many advantages for real estate businesses, most importantly liability protection and increasing credibility for your real estate endeavors. Furthermore, having a separate business entity allows easier property transference than owning it all individually in your name alone. You can also use corporate business losses against future profits, which cannot be done with sole proprietorships or LLCs.
Real estate services corporations (PRECs) may only engage in activities permitted under the Real Estate Services Corporation Act and Regulation, such as offering real estate services. Therefore, PRECs and brokerages they engage must agree to perform services by PRECs.
Real estate professionals typically deal with either buying and selling properties or leasing them, which both present risks to themselves. Contractors could sustain injuries during repairs to properties rented out to tenants, and tenants could cause irreparable damage. Therefore, it would be advisable for real estate professionals to establish a personal real estate corporation (PREC) to safeguard themselves against legal liabilities associated with both strategies. However, there are certain things they should keep in mind before doing so.
It is tax-free
Real estate services involve purchasing, selling, renting, and managing properties for others. These activities generally fall into four main categories: brokerage services, mortgage loan origination services, title insurance/escrow and closing services, home warranties/property casualty insurance, and relocation services. Corporate real estate services also provide space for offices, retail spaces, or distribution centers.
The Department of Citywide Administrative Services (DCAS) provides real estate services. DCAS oversees the acquisition, disposition, and reallocation of surplus City real estate assets, as well as the negotiation and administration of private leases held by City agencies.
Real estate cannot be taken out tax-free when placed into a corporation due to the basis mechanics of Section 351 and special treatment for flow-through gains under Section 721. For this reason, partnerships are generally preferable as an entity for holding real estate; however, even this entity cannot take appreciated property out without incurring taxes.
It is a way to avoid double taxation.
Real estate prices are on an upswing, and investors are seeking ways to reduce taxes. C corporations generally aren’t recommended as holding depreciable real property due to tax reasons; single-member LLCs or revocable trusts may provide better results from a tax standpoint. But in certain situations, using an S corporation to own and develop raw land for parcel sales might pay off; unlike C corporations, income, and gains are passed directly through shareholders, so any profits from land sales will only be subject to ordinary rates instead of capital gains rates.
Some investors may find this to be of great advantage; however, it’s essential that they consult a tax advisor about the legal ramifications and disadvantages associated with these structures and any state-specific issues, such as whether their state recognizes federal S corporation elections and has its own separate business tax structure.
It is a way to build credibility.
Real estate is a people business, and building trust takes time. A credibility kit may help speed up this process by including items that demonstrate your expertise as a real estate investor, such as keys to properties or cash reserves, to establish your credibility faster. These items might include:
Establishing your credibility with real estate investors by creating a blog or website can also help build it. Such platforms should include both your contact details and company history in an easily navigable format, along with links to social media profiles so as to expand reach. Guest blogging on established real estate blogs can further establish expertise.
Network with other real estate professionals. Joining online forums such as BiggerPockets Forums can be an excellent way to connect with other experienced investors and learn from their experiences. Getting involved with local community activities can also help establish your credibility.
Transparency is essential to real estate credibility. Investors tend to distrust property managers, so it is crucial that investors can see exactly how you collect rent and manage properties. Receiving positive testimonials from satisfied clients can further strengthen your credibility as an industry professional.
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