I am a college student, and I dont have a job or any earned income.
If I did a flip and made 40k, would I be charged the 15% social security tax on that, or could I list it as investment income and only pay ordinary income taxes. Im assuming you could do it either way but what would the IRS’s opinion be?
The IRS would say that your flip profit is self-employment income. Ordinary income taxes and payroll taxes would be assessed.
Ouch, Dave thats not what I wanted to hear!
Im my situation, from what I have read I think it would make sense to set up an LLC that is taxed as an S corporation.
That way I could only tax 10-15k as reasonable salary and then distribute the rest as dividends. I am planning to put away a good chunk into a retirement account ( a solo 401k ).
After I buy the house and while rehabing it, could I set up the LLC and then transfer the property into it so that I can reap the benefits on the first deal, without setting up a LLC before even doing a deal?
this is something you should definitely talk to a CPA about.
i’m not so sure about Dave’s answer only because you only did ONE project.
now if you did two or three etc…that’s different.
as for your dividend thing with the S Corp - check with a CPA seriously
S-Corp is just like an LLC with some variations, you get taxed on the whole shibang.
and i don’t understand - you bought a property in 06 and sold it for 40k profit? or you’re planning to do this?
this:
After I buy the house and while rehabing it, could I set up the LLC and then transfer the property into it so that I can reap the benefits on the first deal, without setting up a LLC before even doing a deal?
the first deal has nothing do with with LLC that you set up during your second project…
but i’m totally confused about all this - you seem all over the place, no offense.
Sorry I could have explained it better
I havent done a deal, and this is a hypothetical situation but hopefully will come true in the near future
The original question was if I bought my first property and rehabbed it in my name, would those profits be subject to the Self Employment Tax, and it sounds like they probably would.
The second part is If I set up a S corporation (or an LLC that has elected to be taxed as a S corp) could the corporation pay me a salary of around 40% of the profits from the flip and then distribute the rest as dividends to me which would not be subject to the Self Employment tax.
The property would be put in a land trust with the corporation as the beneficiary so that the profits would be the corp’s and I am simply working for it getting a salary. John hyre of realestatetaxlaw.com says this can be done but I am looking for people who use this tax method. Thanks
reread your last post
then ask yourself…“What?”
have u considered, at all, what will go into doing what you propose?
i don’t care what John Hrye said of realestatetaxlaw.com said -
if you’ve never done a real estate deal before - AVOID THIS COMPLETELY.
you’ll be wasting your time. read your post again, seriously and just sit back and ask yourself, “what?”
I completely understand what I asked…could you elaborate on your comment . I dont see what is so off base with my question??
I dont know about you but for a few hundred dollars to set up and manage an LLC including consulting with an attorney and accountant, I would be pretty happy to save thousands in taxes each year, am I missing something? I dont want to pay taxes to the government that I dont have to if I can be smart and use the tax code to my advantage
TMCG,
According to the IRS, even doing only one flip makes the transaction a dealer disposition. Ordinary income taxes and self=employment income taxes apply if done through a pass-through entity or as a sole propriietor. Additionally, if the property is sold with seller financing, installment sale tax treatment is not allowed.
Here is relevant language from Section 453 of the tax code.[b]
The term “dealer disposition” means any of the following dispositions:
(A) Personal property [list]
Any disposition of personal property by a person who regularly sells or otherwise disposes of personal property of the same type on the installment plan.
(B) Real property
Any disposition of real property which is held by the taxpayer for sale to customers in the ordinary course of the taxpayer’s trade or business. [/list]
[/b]Seems clear to me that the word “Any” in this definition means that a property flip gets the dealer disposition tax treatment even if you only do ONE.
BS3488,
Yes this can definitely be done. Rather than setting up an S-Corp, go the easier route. Use an LLC treated as an S-corp for tax purposes. Less formal organization and no corporate stock to deal with.
Thanks Dave, now I just need to shell out some bucks and consult with an accountant and attorney :o
first of all,
B,
i’m not talking about speaking to an accountant or attorney.
what i’m saying is when you talk about “using a land trust” and doing all these other fancy things is, IN MY OPINION, too much for the new investor to even consider.
don’t bog yourself down with all this technical stuff.
learn the BASICS of real estate investing. do an actual deal after you understand the BASICS of contracts, negotiating and the relationships between buyer, seller, broker, title company, appraiser, bank, etc…
simple.
keep it simple.
i’m NOT saying that what you’ve proposed is wrong or bad. i’m simply saying to simplify brother.
unless you have a good foundation in business and/or law - that stuff you’re proposing is over the top -
you want to create an LLC, that’s good. i recommend it. it’s a business entity - pass through.
if you want to elect S-Corp status - TALK TO YOUR ACCOUNTANT.
that may, MAY not be necessary and depending on your investment strategies, may not be your best option.
Dave -
that’s very nice of you to go out and do that homework. thanks for the clarification, however, if you’re going to survive in this business, you’ve got to realize ALL the advantages of business deductions and understanding the IRS and how they conduct themselves.
i’m NO EXPERT. and i’m not pretending or presuming to say that what you wrote is wrong in anyway.
i’m simply saying that the IRS has many rules and regulations that offer many advantages to businesses and investors.
if B bought a property, lived in it for a year and sold it, to me, the “intent” of B would not be crystal clear to the IRS out of the 200 million people that pay taxes. B’s intent could be explained in many different ways and would not necessarily fit the category set forth by the IRS.
if B’s intent was to live there, it’s perfectly reasonable to conclude that after that year, he just simply wanted to sell it for whatever reason he wanted to.
now you start purchasing things with LLC’s and doing this every year - well then, that obviously would impact intent and reasonability.
bottom line - consult a GOOD CPA and a REAL ESTATE ATTORNEY.
thanks for the clarifications, I understand you views better now. I agree with you that I should be focusing on getting a deal done and then consider my options. I was just asking if this was possible and wanted to see if this was a common practice. Now the hard part is that I need to find some professionals who know creative real estate.
One more question though…Say I buy a property in my name and then I decided to set up an LLC while im rehabing it. How can I convey ownership rights of property over to the LLC without it being considered a sale. Im pretty sure that a quit claim deed isnt as usefull or correct as everyone makes it out to be. Im asking this because I might as well have the LLC be the one making the profits and building credit, not to mention asset protection if a contractor gets hurt
if you’ve got a mortgage on the property, there really is no other way to convey ownership to the LLC unless you sold it to the LLC.
you could “try” and see if the lender would allow you to have LLC assume the loan in a purchase contract with some small consideration to yourself. but that’s not going to happen because the bank will not be into this.
if you use a private investor or HML - then maybe this could happen, but you will have to PG (personally guarantee loan).
as for having the “asset protection” against being sued - even with LLC, there’s no automatic protections. it’s definitely better and a step in the right direction.
TMCG,
I don’t know where this is coming from. BS3488’s stated intent is to flip property for profit.
Since we were already told that the plan is to flip property, I only answered his question about the tax treatment for this plan. Hopefully, I also cleared up a common misunderstanding on dealer dispositions as well.