Is there a benefit to incorporate my 4 unit rental property?

Asked over 4 years ago - Beaver Falls, PA

My rental property has 4 units currently valued at $180,000. There is a mortgage in my name of 75000. I have 2 siblings that I need to share in the equity, but they have no money to contribute to the corporation. We want to invest an additional $70000 to upgrade the property to get more rent. If we incorporate will the bank lend money to the corporation instead of me only? My 2 siblings have no personal credit or financial ability to invest. I would like to get the financial responsibility off my personal credit report as I am looking to retire from my full-time job within the next 3 years.

Attorney answers (1)

  1. James S. Tupitza

    Contributor Level 18

    Answered . There are at lease three reasons why you would not put investment real estate in a corporation in PA. 1) Capital Stock tax. This is an onerous state tax calculated on a formula of past income an current net worth. The longer you own the property the larger the tax burden until you head explodes with anger for putting the property into a corporation. 2) One of the benefits of investment real estate is the ability to use it as a tax shelter. No shelter is available when in a corporation. 3) Transfer tax. The transfer into a corporation by you is subject to a 1% state and 1% or greater local realty transfer tax.

    Will the bank lend to someone other than you. About the time Bill Mazeroski hits another World Series homer in the bottom of the ninth with the score tied at 9-9!!! You will always have to be the guarantor for any loan. Even if they don't ask your siblings to guarantee, make them do it to avoid family trouble in the future.

    What entity should you use. I think the best entity in a Limited Partnership with an LLC General Partner. You and your siblings own the LLC, you get appointed the manager, and each of you become limited partners. Prepare a partnership agreement that permits transfer to family members but otherwise makes it difficult for anyone to sell their interest.

    You must see a lawyer for this work. It is way too complicated to do yourself.

    The response given is not intended to create, nor does it create an ongoing duty to respond to questions. The response does not form an attorney-client relationship, nor is it intended to be anything other than the educated opinion of the author. It should not be relied upon as legal advice. The response given is based upon the limited facts provided by the person asking the question. To the extent additional or different facts exist, the response might possibly change. Attorney is licensed to practice law only in the Commonwealth of Pennsylvania. Responses are based solely on Pennsylvania law unless stated otherwise.
    James S. Tupitza
    212 West Gay Street
    West Chester, PA 19380
    610-696-2600

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