I am a newbie, and I just registered my LLC with my states SDAT. I now want to file for my LLC’s FEIN but I have a few questions that I think only real estate investors can give the best answers to. When filing for an FEIN for my company, should I accept the default position of disregarded entity and have the expense and profits flow through my personal tax return or elect for corporate filing status and let the company be seen as a corporation by the IRS or elect to be taxed as a partnership? Which one gives one the ability to keep back a lot of the profits?
thanks for your anticipated answers.
Tell us more about your LLC. What is your LLC’s investment strategy?
If you plan to buy and hold for rental income, then a disregarded entity or a partnership is probably better for your LLC. If you plan to flip property for quick profits, then an S-corp is probably better.
For now I plan on buying properties from owners directly on long term purchase options or subject to deals and the rent-to-own them to tenant-buyers. Hence I believe it is rather long term.
This is just to get my feet wet but for wholesaling and shortsale deals I will open another LLC and I am thinking of allowing that to be taxed as a corporation by the IRS.
What do you guys/gals think? Also does my strategy seem sound?
The thought also occured to me that for my shortsale and flipping deals I can establish an S-corp and have the owner of the S-corp by my LLC. Is that sound? What are your views on that?
Your investment strategy is probably best served by an LLC treated as an S-corp for tax purposes.
Your investment strategy is that of a dealer to real estate. Ordinary income tax rates and self-employment income taxes will apply to your net profit.
Consult your own tax advisor for specific details.
why would you want a true S-corp? Use an LLC with lower paperwork hassles and stronger protection and simply tax it as an S-corp. Best of both.
I agree with Dave. For flips, tax as an S-corp, pay yourself a reasonable salary, and avoid SE tax on the rest.
FYI you make the tax election for S-corp on the 2553. some people file the 8832 to tax the LLC as a corporation, and then follow up with the 2553 to make it an “S”, but technically it’s not necessary to do both; the 2553 assumes the 8832.
I have registered an LLC for may long term properties that I will get using purchase option strategies and then rent-to-own them out to tenant-buyers. I will then go register another LLC for my shortsales and flips and have the member of this new LLC by my original one (is that a good strategy tax wise?), my real question now is should I elect to be taxed as an S-corp for the new (future) LLC that I will have properties in shortterm or elect for S-corp for both my future and current LLC (this one with long term properties)?
Is there not a residency requirement for establishing S-corps?
Mark already told you that you don’t want a true S-corp, you want and LLC treated as an S-corp for tax purposes. State law requires that your LLC have a resident agent.
Ok thanks for you advise, just to make sure I got you right. I change both LLCs to be taxed by the IRS as S-corps. both the LLC I will used for Long term holding and the one I use for flips?
No, you only want the LLC (S-corp) for your dealer activity – your flips. The other LLC that holds your rental property, should probably be a disregarded entity.
Thank you now I get it clearly.
What actions or strategies in the real estate business are consider dealer activities by the IRS?
if you purchase with the intent to resell - then you are a dealer on that property. To avoid dealer status you have to purchase with the intent to hold, usually identified by advertisements to rent, yard signs, lease agreements, etc.
Well here is my strategy, and after you read through it let me know if you think I will be considered a dealer.
I plan on getting control of homes for motivated sellers through various purchase options for long periods of time if possible (3-5 years) and then putting in tenant-buyer who would come in and have a right to buy the house within a shorter period of time and make me a profit.
When try to sell the house, my ads will be “RENT TO OWN” based ads. I will have the tenant buyer sign two documents at least. One which is a regular tenant lease and the other is the option agreement. I will then collect a none refundable option agreement, one months rent and a refundable security deposit.
So after hearing this, am I still a dealer?
Yes, you are. You are marketing to sell. A lease option technique only facilitates the sale. And, since you seem to be in a sandwich lease option arrangement, you are just waving a huge red “dealer” flag at the IRS.