We get reports from our professional partners in the self-directed real estate sector that some folks are being steered to a C-Corporation for their real estate investments. How sad!
The C-Corporation strategy; form a C-Corporation (new company), put a 401(k) plan in place, transfer existing self-directed funds from an IRA or 401(k) to the new plan, then invest in stock of the new company. The new company then invests in a business or franchise. This strategy is used to allow a self-directed plan to invest in a business. Pretty good so far.
What we are hearing and seeing is that some self-directed investors are investing in real estate from this structure. Not so good.
When using this structure, the C-Corporation is a taxable entity (not tax deferred). There are no capital gain tax benefits in a C-Corporation. The real estate profits down the road will be taxed at ordinary corporate rates, usually more than double the current 15% capital gain rates.
A better strategy for real estate investing is to forget the C-Corporation. Have your client open a checking account from the 401(k) and invest as the trustee of their own plan. The cost is less and they get to keep more of their hard earned investment dollars. What could be better than that?