Should You Own Real Estate Through a Corporation?

The short answer: a corporation can own real estate, and many do, but for a family holding a rental property, a vacation home, or a building it intends to pass to the next generation, a corporation is almost always the wrong vehicle. The problems are structural. A C corporation pays tax on the rent and the shareholders pay tax again on the dividends. Property inside any corporation, C or S, does not receive a stepped-up basis when the owner dies, so the heirs inherit the founder’s decades-old cost basis along with the building. And once real estate is inside a corporation, getting it out is treated as a sale at fair market value, with tax due even though no money changed hands. A limited liability company, a partnership, or a trust avoids each of these problems while offering the same liability protection.

This article explains why corporate ownership of real estate causes trouble, what happens at death and on the way out, how New Jersey, New York, and Connecticut tax transfers of an entity that owns property, and what to do if the real estate is already inside a corporation.

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Can a Corporation Own Real Estate?

Yes. A corporation is a legal person and may hold title to land, take a mortgage, sign a lease, and sell. No state law prevents it. Corporations own office towers and shopping centers everywhere, and the shareholders of a small corporation may even live in a house the corporation owns, though doing so has consequences described below.

The question is not whether a corporation can own real estate but whether it should, and for individuals and families the tax law answers that question against the corporation on at least four points.

Why Is Getting Real Estate Into a Corporation a Problem?

Transferring property you already own into a corporation you control is usually tax-free under Section 351 of the Internal Revenue Code, which allows a transfer of property to a corporation solely in exchange for its stock without recognizing gain, so long as the transferors control the corporation afterward. Real estate often fails that test in practice because of debt. If the corporation takes the property subject to a mortgage, the mortgage counts as a liability assumed, and under Section 357(c) the amount by which the liabilities assumed exceed the adjusted basis of the property transferred is treated as gain. An owner who refinanced a building years ago and pulled out cash may have a mortgage well above basis, and moving that building into a corporation triggers tax on the difference immediately.

Transferring the same property to a partnership or a multi-member LLC taxed as a partnership does not carry the same liabilities-over-basis trap in most cases, and a transfer to a single-member LLC or a revocable trust is ignored for income tax purposes altogether.

Why Is Owning Real Estate in a C Corporation a Problem?

Two layers of tax. A C corporation pays federal income tax on its net rental income at 21 percent under Section 11(b), before any state corporate tax. When it distributes what is left as dividends, the shareholders pay tax on the dividends at qualified dividend rates of up to 20 percent, plus the 3.8 percent net investment income tax for single filers with modified adjusted gross income above 200,000 dollars and joint filers above 250,000 dollars. The combined federal burden on a dollar of rent can approach 40 percent before state tax, compared with a single layer of tax at the owner’s rate if the same building were held in an LLC.

A corporation also cannot use the personal residence exclusion. Section 121 excludes up to 250,000 dollars of gain, or 500,000 dollars for a married couple, on the sale of property “owned and used by the taxpayer as the taxpayer’s principal residence” for two of the last five years. A corporation does not live anywhere. A family that puts its home in a corporation, whether for privacy or perceived protection, gives up that exclusion on the eventual sale.

Does an S Corporation Fix These Problems?

It fixes one. An S corporation is a pass-through, so rental income is taxed once at the shareholder level and there is no dividend tax. But it leaves the others in place and adds two of its own.

First, losses are limited. Under Section 1366(d), a shareholder may deduct losses only up to the adjusted basis of their stock plus the basis of any loans they personally made to the corporation. Unlike a partner in a partnership or an LLC, an S corporation shareholder gets no basis credit for the entity’s mortgage debt. Real estate that generates depreciation losses in the early years often produces deductions the S corporation shareholder cannot use.

Second, a C corporation that elects S status to escape double taxation does not escape cleanly. Section 1374 imposes a corporate-level tax on any built-in gain that existed at the time of the election and is recognized during a five-year recognition period. A building that had appreciated inside the C corporation and is sold or distributed within five years of the S election is taxed as if the C corporation still owned it.

Third, and most important for estate planning, an S corporation shares the C corporation’s problem at death.

What Happens When the Owner Dies?

This is where many articles online go wrong, so it is worth being precise.

Under Section 1014, property acquired from a decedent takes a basis equal to its fair market value at the date of death. When someone dies owning real estate directly, or through a revocable trust or a single-member LLC, the heirs receive the property with that stepped-up basis and can sell it with little or no capital gain. Our article on the step-up in basis for inherited property explains how much this is worth.

When someone dies owning stock in a corporation that owns real estate, the step-up applies to the stock. The heirs’ basis in their shares becomes the shares’ date-of-death value. But nothing happens inside the corporation. The building keeps the basis the corporation always had, often the original purchase price less decades of depreciation. Death itself does not trigger any tax; there is no “deemed sale” at death. The problem is what comes next. When the corporation sells the building, it recognizes the full built-in gain, and in a C corporation pays tax on it. When the heirs then try to take the proceeds or the property out, they face the exit tax described below. The stepped-up basis in the stock helps only if the heirs sell the stock itself, and buyers of small real estate corporations are rare precisely because they would be buying the embedded tax liability.

Partnerships and multi-member LLCs handle this differently. A Section 754 election lets the partnership adjust the basis of its assets for the benefit of the deceased partner’s successor when the interest passes at death, so the inside basis of the real estate steps up to match. Corporations have no equivalent election. That asymmetry, more than any other single factor, is why estate planners steer real estate away from corporations.

What Does It Cost to Get Real Estate Out of a Corporation?

A great deal, usually. Under Section 311(b), when a corporation distributes appreciated property to a shareholder, gain is recognized “as if such property were sold to the distributee at its fair market value.” Under Section 336(a), the same rule applies when a corporation liquidates and distributes its property. The corporation owes tax on the difference between the property’s value and its basis, and in a C corporation the shareholders then owe tax on the distribution as well. No cash changes hands, but the tax is due.

Families discover this when they try to fix the structure. A parent who put a two-family house into a corporation in 1985 for 150,000 dollars, and whose heirs now want to move a property worth 1.2 million dollars into an LLC, cannot do it without recognizing roughly a million dollars of gain. The corporation has become a trap, and the usual answers are to keep the property inside it indefinitely, to sell the property and pay the tax, or, for a C corporation, to elect S status and wait out the five-year recognition period before distributing, which at least removes the second layer of tax.

Does Putting Real Estate in an Entity Avoid Transfer Tax?

No, and this misconception drives some corporate ownership. New Jersey, New York, and Connecticut each tax the transfer of a controlling interest in an entity that owns real property, so selling the shares instead of the deed does not avoid the tax.

New Jersey. The Controlling Interest Transfer Tax applies to the sale or transfer of a controlling interest, meaning more than 50 percent, in an entity that owns Class 4A commercial property when the consideration or equalized assessed value exceeds one million dollars. Since July 10, 2025, under P.L. 2025, c. 69, the tax is imposed on the seller rather than the purchaser and is graduated: 1 percent on consideration over one million dollars up to two million, 2 percent from two million to 2.5 million, 2.5 percent to three million, 3 percent to 3.5 million, and 3.5 percent above that. The same law converted the buyer-paid 1 percent “mansion tax” on residential and other property over one million dollars into a seller-paid graduated fee on the same schedule.

New York. The state real estate transfer tax treats the “transfer or acquisition of a controlling interest in any entity with an interest in real property” as a conveyance. A controlling interest means 50 percent or more of the voting stock of a corporation or 50 percent or more of the capital, profits, or beneficial interest of a partnership, LLC, or trust. New York City’s own transfer tax follows the same approach.

Connecticut. Under General Statutes Section 12-638b, the sale or transfer of a controlling interest in an entity that possesses an interest in Connecticut real property is taxed at 1.11 percent of the present true and actual value of the real property, payable by the seller, and transfers within six months of each other are presumed to be a single series.

What Should Hold the Real Estate Instead?

A limited liability company. An LLC gives the same liability shield as a corporation. A single-member LLC is disregarded for income tax, so the property is taxed exactly as if the owner held it directly, including the step-up at death. A multi-member LLC taxed as a partnership gets one layer of tax, basis credit for mortgage debt, and the Section 754 election. An LLC can be transferred into a trust, and interests in it can be gifted in fractions over time. The costs are modest: New Jersey charges an annual report fee, New York requires new LLCs to publish notice of formation in two newspapers, and, beginning January 1, 2026, New York’s LLC Transparency Act requires LLCs to file beneficial ownership information with the Department of State, with existing LLCs given until January 1, 2027. The federal Corporate Transparency Act no longer applies to domestic companies; the Financial Crimes Enforcement Network exempted them by an interim rule in March 2025 and made the exemption final on August 11, 2026.

A revocable trust. For a personal residence or a vacation home, a revocable living trust avoids probate in each state where property sits, preserves the step-up and the Section 121 exclusion, and costs nothing in ongoing taxes. It provides no liability protection, which is why rental property usually goes into an LLC that is in turn owned by the trust.

An irrevocable trust. For families planning for Medicaid eligibility or estate tax, an irrevocable trust can hold real estate or an LLC interest. The design choices here, especially whether the trust is drafted so the property still receives a step-up at death, are the subject of our article on estate planning for a vacation home.

A limited partnership. Still used for larger family holdings where the senior generation wants to keep control as general partner while transferring limited partnership interests, often at valuation discounts, to children.

What If the Property Is Already in a Corporation?

Do not move it without a plan. The options, in rough order of preference, are:

• Leave it and plan around it. If the family intends to hold the property for decades, the corporation can continue, with the stock passing at death and the stock basis stepping up. The inside gain is deferred, not eliminated, but deferral has value.
• Elect S status. If the corporation is a C corporation, an S election stops the double tax on rent going forward. After the five-year built-in gains period, the property can be distributed with a single layer of tax rather than two.
• Sell the property from inside the corporation when a sale is planned anyway, and accept the corporate-level tax, rather than distributing first and paying tax twice.
• Reorganize only with professional modeling. Some structures, such as contributing corporate stock to a partnership or using a corporate reorganization, are marketed as ways to unlock the property. Most either fail or defer the problem, and the IRS has been attentive to them. Any proposal should be modeled by a tax advisor with the actual basis figures before anyone signs.

The one thing not to do is form a new corporation for the next property. The mistake of the 1980s, when corporate ownership was common because corporate rates were lower and LLCs did not yet exist in most states, does not need to be repeated.

Plan Well. Live Better.

How you hold real estate decides how much of it your family keeps. At Milvidskiy Law Group, we help clients choose the right vehicle for each property, move properties into trusts and LLCs without triggering tax, and unwind structures that no longer serve them. Learn more about our estate planning services.

This article is for general informational purposes only and does not constitute legal or tax advice. Reading it does not create an attorney-client relationship. Tax consequences depend on the specific facts, including basis, debt, entity history, and state of residence, and the rules change. Code sections, rates, and state transfer tax provisions were verified in September 2026 against the Internal Revenue Code, IRS guidance, and New Jersey, New York, and Connecticut sources and should be confirmed with a tax advisor before acting.