How to Avoid Double Taxation in Real Estate: Protect profits & keep more of your earnings💰

by Stephen Morris CPA, MBT, CCIM

✅ Key Takeaways:

✔ Why double taxation happens in real estate
✔ Smart entity structures to minimize tax exposure
✔ How pass-through taxation works 🔄
✔ Pro tips to reduce tax liability on income & gains

🔎 What Is Double Taxation?

Double taxation means paying taxes twice on the same income:
1️⃣ The business pays corporate tax on profits
2️⃣ The owners/shareholders pay tax again when profits are distributed

Example:
A C corporation earns $100,000 in rental income.

• Pays 21% corporate tax = $21,000
• Distributes remaining $79,000 to shareholders
• Shareholders pay up to 23.8% in dividend taxes = $18,802

Total tax paid: $39,802 ❌

That’s a 39.8% tax rate 😱 — not ideal for real estate investors!

🔄 Why Real Estate Investors Should Avoid C Corporations

C corporations (double tax exposure)
✔ Profits taxed at corporate level
✔ Distributions taxed again to owners

At Advise RE we believe there are better options for most real estate investors 👇

🏠 Best Structures to Avoid Double Taxation

✅ LLC (Limited Liability Company)

✔ Pass-through taxation — profits flow directly to members
✔ Avoids corporate tax
✔ Flexible ownership & management
✔ Deductible expenses & depreciation

Example:
$100,000 profit → reported on owners’ personal tax returns only.
No double tax.

✅ S Corporation

✔ Pass-through taxation
✔ Ability to pay yourself a salary & avoid self-employment tax on remaining profits
✔ Limits on ownership (100 shareholders max, U.S. citizens/residents only)

Best for: Investors running active real estate businesses (flipping, wholesaling, etc.)

✅ Partnerships (LP/LLP)

✔ Pass-through taxation
✔ Flexible profit-sharing
✔ Easy to admit new partners
✔ Can combine with LLCs for added liability protection

💰 Other Tax-Smart Strategies

📝 Use Depreciation to Lower Taxable Income

✔ Offset rental income with depreciation deductions
✔ Recapture taxed later, but at lower capital gains rates in many cases

🔄 1031 Exchanges

✔ Defer capital gains tax when swapping investment properties
✔ Protects against double taxation when rolling profits into new deals

🏦 Reinvest Earnings

✔ Retain profits inside pass-through entities
✔ Reduces exposure to taxable distributions

⚠ Common Mistakes That Trigger Double Taxation

🚫 Operating rental properties inside a C corporation
🚫 Taking excessive profits as salary in an S Corp
🚫 Poor entity structuring across multi-state portfolios
🚫 Not leveraging depreciation or deferral tools

💡 Pro Tip:

Always work with a CPA experienced in real estate tax planning.
Proper structure & proactive planning = huge tax savings.

🔎 Final Thoughts: Keep More of What You Earn

✔ Use pass-through entities (LLCs, S Corps, partnerships)
✔ Plan for depreciation & capital gains deferral
✔ Avoid C corporations for rental property ownership
✔ Get professional advice early to prevent costly tax mistakes

📞 Need Help Structuring Your Real Estate Investments?  Contact Us

Back to Advise RE Resource Center articles list

Asset Protection for Real Estate Investors
How to Avoid Double Taxation in Real Estate
Real Estate Entities and IRS Compliance
Real Estate Trusts vs. LLCs
Choosing Between LLC, S-Corp, and Partnership
CPA Guidance on Creating Real Estate Entities
Structuring Entities for Multi-State Properties