I am pursuing a flip opportunity with the help of friend who is lending me money to purchase the property with cash.
I am going to pay him a % on the amount loaned once I refinance the property (he is not sharing any risk , irrespective of profits he will get his %).
I understand the benefit LLC or Corp will provide benefits of liability protection , which I can also get by purchasing a liability insurance.
The question is how would I show the % paid to the hard money lender as an expense (he is also not a registered business entity , lending me more like a hand loan)
The downside of LLC is to file taxes every year (is this really a downside or upside for me as I make $120k plus on my day job)
What is the best tax benefit strategy for me looking at $20k to $30k profit from flip this year ?
he loans you $100k.
you buy house
you refinance house
you pay him $105k. That’s $100k return of principal and $5k interest expense. You send him a 1099-INT for $5k.
entities are irrelevant. business expenses are always deductible. this includes interest expense.
on a flip you purchased inventory. every dollar you put in to the rehab is inventory. The year you sell your inventory, it goes on Sch C. The good news is that as ordinary income this would be subject to self employment tax (FICA/Medi) but since you are over the FICA limit, you will only pay income tax + medicare.
Note that a flip is NOT a capital gain.
Nothing about this changes if you have an LLC, it will just be an extra tax return that passes through to your 1040. LLC is an asset protection device, not a tax planning device. Business expenses are always deductible. Personal expenses are never deductible. Nothing about an LLC magically changes non-deductible personal expenses into deductible business expenses.
Incidental expenses that are not part of the rehab: property taxes, office supplies, cell phone, business cards, utilities (maybe) - will need to be expenses in the year incurred.
Your BEST tax benefit strategy is to open a separate checking account for the rehab and pay EVERY expense through this checkbook so you can make sure you claim EVERY deduction.
I answered above, however, in my opinion – when implementing entities, asset protection, proper management and structure, looking at the so called “downside” is a fallacious exercise. It’s penny wise and dollar foolish. Doing it the right way is the price of doing it the right way. It’s negligible in the overall scheme of things. If you are looking to make $30 on this alone – a few hundred dollars for a schedule/pass-through is nothing. JMO.