For most real estate investors, an LLC taxed as a partnership is generally a better choice than an S corporation from a tax planning perspective.

Why Do Partnerships Often Win?

Debt Increases Basis: Real estate is commonly financed with loans. In a partnership, debt generally increases an owner’s tax basis, which can help maximize loss deductions and allow tax-free cash distributions. S corporations generally do not provide this benefit.

Greater Flexibility: Partnerships allow for preferred returns, unequal ownership economics, and multiple investor structures. S corporations are limited to one class of stock and have restrictions on who can be an owner.

Better for Appreciated Property: If real estate is distributed or ownership is restructured, S corporations can trigger taxable gains even when no cash is received. Partnerships typically offer more favorable treatment.

Avoids Future Conversion Problems: Moving appreciated real estate from an S corporation to a partnership is generally a taxable event that can create significant tax costs.

The Section 754 Advantage
A Section 754 election is a powerful partnership-only tax benefit. When a partnership interest is sold or inherited, the new owner may receive a basis step-up in the underlying real estate. This can create additional depreciation deductions, reduced taxable gain upon sale, and better after-tax returns for buyers and heirs.

An S corporation stock purchase generally does not provide this asset-level basis adjustment.

Bottom Line
If rental real estate is expected to use leverage, appreciate over time, bring in new investors, or transfer to future generations, an LLC taxed as a partnership will often provide the most flexible and tax-efficient structure. The potential benefits of a Section 754 election further strengthen the partnership advantage.

Contact Matthew Tomko at mtomko@tomkocpa.com to learn more or connect with us at the link below.

Disclaimer: This blog is for informational purposes only and not intended to be taken as professional advice. Always consult a qualified professional for specific guidance. While we aim to keep information accurate and current with tax regulations, be sure to review guidelines annually for updates as they frequently change.