Why S-Corps Don’t Work for Rental Real Estate?

Why S-Corps Don’t Work for Rental Real Estate

Let’s clear up a common misunderstanding: S-Corporations are not a good fit for owning rental properties.

Here’s why this distinction matters so much.

The IRS created each entity type with a specific purpose in mind.

S-Corps were designed to reduce self-employment taxes on active business income—income you earn by working in the business.

That’s where S-Corps shine.

But rental real estate?

That’s passive income by nature—income generated without your active involvement.

And passive income isn’t subject to self-employment tax in the first place.

So putting rental properties into an S-Corp doesn’t save you a dime in taxes.

Worse, it can actually make your life harder.

The Problems S-Corps Create for Real Estate Owners

When you hold rentals in an S-Corp, you face unnecessary restrictions and complications:

❌ No deductions for debt-financed losses (due to basis limitations)

❌ No special allocations of income or losses between owners

❌ Complicated property transfers and distributions

❌ More difficulty completing 1031 exchanges

❌ Limited ownership flexibility (no trusts, no foreign investors)

These limitations can block you from using powerful real estate tax benefits.

What the Tax Code Actually Encourages

The tax law is designed to help real estate investors succeed.

It offers advantages like depreciation, 1031 exchanges, and passive loss allowances—but only if you use the right structure.

The Right Entity for Rental Properties

For rental real estate, LLCs are almost always the better choice:

✅ Single-member LLCs (taxed as disregarded entities) or

✅ Multi-member LLCs (taxed as partnerships)

Why LLCs make sense for rentals:

Asset protection from liability

Flexible profit and loss allocations

Full deductions for debt-financed losses

Straightforward 1031 exchanges

Fewer tax and ownership restrictions

Simple setup and management

The Bottom Line

S-Corps are fantastic for active businesses—where you can actually save 15.3% in self-employment tax.

But they’re the wrong choice for passive rental income, where there’s no such tax to avoid.

Always match the entity to the type of income.

That’s the foundation of smart tax strategy.

The tax code gives you tools—each built for a specific job.

Use them wisely, and you’ll build wealth efficiently.

Use the wrong one, and you’ll create unnecessary problems.

Entity structure matters.