Hi, I am a CPA who thinks I can answer your question.
Electing S-Corp status does not automatically make your losses active trade or business losses, and will not increase your chances of deducting losses from passive activities such as rental real estate. You can treat your LLC as a sole proprietorship or partnership for tax purposes, depending on the number of owners, without electing S-Corp status and get essentially the same type of deductions. In fact, electing S-Corp status may decrease your chances of deductions, because of additional restrictions on S-Corp deductions such as basis limitations, at-risk limitations, limitations on using the standard mileage rate for auto expenses, etc. in addition to the passive activity loss restrictions.
All three types of entities pass through the income and deductions from the LLC to their owner's personal tax return(s).
I suspect that the real issue is whether your business activities could be considered active trade or business activities versus passive rental activities, and whether your "business" is in start-up mode or not. These items affect the deductibility of business expenses more that whether you elect S-Corp status or not.
Generally, I do not advise electing S-Corp status for holding rental real estate if holding properties is your only activity within the S-Corp. If you are conducting other business activities which would be considered an active trade or business, then there are other advantages of S-Corp treatment worth considering, but not the ones you mentioned.
This whole area is a complicated area requiring personal discussion, and we offer a free one half hour consultation if that would help.
Don McCartney, CPA
817-563-7717
