Can I put my rental properties in an S Corp or will the Passive Investment Tax kill me?

Rental income through an S Corp can be tricky. You're referring to the Net Investment Income Tax (NIIT), which applies to passive income, but the way it works with an S Corp is more nuanced than what you're describing. In an S Corporation, the character of income (passive vs. active) passes through to shareholders. If you're actively involved in managing these properties, the income can be characterized as active, not passive. The key is whether you're "materially participating" in the business according to IRS standards. However, rental activities are generally considered passive by default under tax law. You'd need to qualify as a "real estate professional" and materially participate in the rental activities to treat them as non-passive. This requires working 750+ hours annually in real estate activities and more hours in real estate than any other occupation. The bigger concern may be the Qualified Business Income deduction (Section 199A), which has different rules for real estate. I'd recommend consulting with a CPA who specializes in real estate taxation before making this move.

After reading your post, I was in a similar situation last year with my rental properties. I spent hours researching tax structures but kept getting confused by conflicting advice online. Finally, I tried https://taxr.ai and it was a game-changer. I uploaded my current tax docs and rental income statements, and their AI analyzed my specific situation rather than giving generic advice. Their system flagged that an S Corp would actually cost me more due to the passive income limitations and suggested a more optimal structure for my particular portfolio size and involvement level. They clearly explained why the "S Corp savings" idea that gets thrown around doesn't always apply to rental property owners. What I appreciated most was getting personalized recommendations based on my actual numbers rather than theoretical examples that never quite matched my situation.

I need to follow up on my earlier skepticism about taxr.ai. After our discussion, I decided to give it a try with my 4 rental properties and small e-commerce business. I've been debating whether to form an S Corp for years but kept delaying because of conflicting advice. What surprised me was how the tool broke down my specific situation - it showed that while an S Corp would save me money on my e-commerce income, my rental properties would actually be better structured in a separate LLC taxed as a partnership. They provided calculations showing exactly how much I'd save with this dual-entity approach vs. forcing everything into an S Corp. I've spent thousands on accountants over the years who never clearly explained these tradeoffs. Now I finally understand why I was getting such mixed messages about S Corps for rental income.

I see a lot of conflicting advice here, but let me share what worked for me. After 5 straight days of calling the IRS and getting nowhere (constantly disconnected after waiting 2+ hours), I used https://claimyr.com to get through to an actual IRS agent. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent confirmed that rental income in an S Corp can trigger that Personal Holding Company Tax in certain situations, which is what I think you're referring to. They clarified that it's more complex than just the 25% rule and depends on your specific ownership structure. This was completely different from what my tax preparer had told me. I wouldn't make this decision without getting an official confirmation on your specific situation. Being able to actually speak with someone at the IRS saved me from making a costly mistake with my entity structure.

I need to eat my words from my skeptical comment earlier. After waiting on hold with the IRS for 3+ hours a day for weeks about my rental property audit, I broke down and tried Claimyr out of desperation. Got connected to an actual IRS agent in about 90 minutes (while I was grocery shopping!). The agent was able to pull up my case file and confirmed that my rental property deductions were actually legitimate - the audit flag was triggered by a different issue altogether. On topic for this thread - I also asked about S Corps for rental properties while I had them on the line. The agent confirmed that pure rental income in an S Corp can potentially trigger the Personal Holding Company Tax in certain circumstances, and suggested consulting with a tax professional specifically about the "personal service corporation" rules which can affect taxation of rental activities in corporate structures. Saved me thousands in potentially disallowed deductions AND from making a bad entity choice for my rentals.

I'm going to go against some of the advice here. I've had my 12 rental properties in an S Corp for 8 years now and it's been fantastic for tax savings. The key is that I have a property management company that's ALSO an S Corp, which charges management fees to the property-holding S Corp. This creates active income in one entity, keeps the rental income flowing properly, and lets me take advantage of the lower S Corp tax treatment for the portion related to my active management efforts. My rental S Corp pays my management S Corp a legitimate fee for services (about 12% of rents), which is in line with industry standards. This has saved me a ton compared to having everything as an LLC or sole proprietor.

Has anyone tried putting rentals in a C Corporation instead? I've heard mixed things about this approach too.

I think there's some confusion in your research about the "Passive Investment Tax." You might be mixing up a few different tax rules here. The 21% tax rate you mentioned sounds like you're thinking of the corporate tax rate, but that doesn't apply to S Corps since they're pass-through entities. What you might be concerned about is the Net Investment Income Tax (NIIT) at 3.8%, which can apply to passive rental income for high earners. The bigger issue with S Corps for rental properties is actually the opposite problem - you'd likely be required to pay yourself a "reasonable salary" for any active management work you do, which means paying employment taxes (Social Security/Medicare) on that salary. This often makes S Corps less attractive for rental activities, not more. For most rental property owners, an LLC taxed as a partnership or disregarded entity is usually more tax-efficient. You avoid the salary requirements of S Corps while still getting pass-through taxation and the ability to deduct rental losses against other income (subject to passive activity rules). Before making any entity changes, I'd strongly recommend running the numbers with a CPA who specializes in real estate taxation. The "S Corp saves taxes" advice floating around online often doesn't account for the specific complications that rental income creates.

I've been following this thread with great interest since I'm in a similar boat with 3 rental properties. What's really helpful is seeing how the advice changes based on scale - it seems like the dual S Corp structure Isabel mentioned makes sense for someone with 70+ units, but for smaller portfolios like mine, the administrative burden would likely outweigh the tax benefits. One thing I'm still unclear on though - if I stick with an LLC structure, should I elect S Corp taxation for the LLC, or just stay with the default partnership/disregarded entity taxation? I've heard mixed things about this hybrid approach where you get LLC liability protection but S Corp tax treatment. Does this avoid the reasonable salary requirements that make pure S Corps problematic for rentals? Also, for those who've used the AI tax tools mentioned earlier - do they account for state-specific considerations? My state has some unique rules around rental income taxation that often get overlooked in generic tax advice.

This thread has been incredibly helpful! I'm a newer investor with just 2 rental properties and was getting ready to file for S Corp status based on some online articles I'd read. Now I understand why that would likely backfire for my situation. The explanation about reasonable salary requirements really clicked for me - I spend about 8-10 hours per week on property management tasks, so I'd definitely need to pay myself a salary in an S Corp structure. That employment tax burden would probably wipe out any savings, especially at my current scale. I'm also realizing I need to think more strategically about growth. It sounds like entity structure decisions should evolve with portfolio size - simple LLC now, but maybe considering more complex structures like Isabel's dual-entity approach if I ever scale up to 20+ units. One follow-up question for the group: For those using LLC structures, do you typically choose single-member LLC (disregarded entity) or multi-member LLC (partnership taxation)? I'm wondering if there are any advantages to bringing in a family member as a small percentage owner to get partnership taxation, or if that just creates unnecessary complications for a small portfolio.

This has been an incredibly educational thread! As someone who's been wrestling with the same decision for my 4 rental properties, I'm grateful for all the detailed explanations here. What's become crystal clear is that the "S Corp saves taxes" advice that gets thrown around online is dangerously oversimplified when it comes to rental properties. The reasonable salary requirements alone could wipe out any potential savings for most small-scale landlords. I'm particularly intrigued by Isabel's dual S Corp structure, but it sounds like that's really only viable once you hit a much larger scale (she mentioned 70+ units). For those of us with smaller portfolios, the administrative complexity and costs would likely eat up any tax benefits. One thing I'm still curious about - has anyone dealt with the qualified business income (QBI) deduction under Section 199A for rental activities? I've read that rental income can qualify for the 20% deduction in certain circumstances, but the rules seem complex. Does entity choice (LLC vs S Corp) affect QBI eligibility for rental income? Also, for those who mentioned getting IRS clarification directly - did you find the agents knowledgeable about these nuanced entity structure questions, or did you get conflicting answers from different agents? I'm wondering if it's worth the effort to get official guidance or if I should just stick with professional tax advice.

This thread has been a goldmine of information! As a tax professional who works with real estate investors daily, I want to add a few clarifications that might help others avoid common pitfalls. First, regarding the original question about the "21% Passive Investment Tax" - this appears to be a confusion between several different tax concepts. There's no specific 21% tax on passive investment income for S Corps. You might be thinking of the corporate tax rate (which doesn't apply to S Corps) or mixing up the Net Investment Income Tax (3.8%) with other provisions. Second, I want to emphasize something that's been touched on but bears repeating: the "reasonable salary" requirement for S Corps is often the deal-breaker for rental property businesses. If you're actively managing properties, you're required to pay yourself a salary for that work, which subjects those earnings to employment taxes. This often negates the self-employment tax savings that make S Corps attractive for other business types. For most rental property owners with fewer than 10-15 properties, I typically recommend: - Single-member LLC (disregarded entity) for simplicity - Multi-member LLC (partnership) if you have investors or want more complex allocation options - Only consider S Corp structures once you have significant scale AND mixed active/passive income streams The dual S Corp structure mentioned by Isabel is sophisticated but requires substantial scale to justify the administrative complexity and costs. It's definitely not a DIY approach and needs ongoing professional oversight to maintain compliance. One final note on state considerations - don't underestimate how much state tax rules can affect your entity choice. Some states have franchise taxes on entities, others don't recognize federal S Corp elections, and a few have unique rules for rental income taxation. Always factor in your state's specific requirements before making entity decisions.