I’m brand new at rei, actually I haven’t even started yet, my husband and I want to flip houses. Most of the advice I read on this thread says “set up a LLC.” My question is could/should we set one up before we buy our first house to flip? We want to finance the purchase with a loan, but obviously, we’ll be using our personal money for rehabbing.
Thanks, MZ.
Yes. Finance to the LLC if the lender will do that. A personal guarantee of the debt may be required.
Loan the LLC cash for the rehab: promissory note, interest, the whole deal.
Do not mix personal and business finances.
Mark Wagner, CPA
Sure thing ,it would certaintly be better to setup your LLC first .Then get started building credit for your LLC buy establishing credit under the company through secured and unsecured debts (credit cards/credit lines/loans etc).There are also other ways of building credit for your company.In the mean time while you shop around for properties to purchase most likely you will qualify easier (unless your buying them cash)buying them under your name individually and then transfering ownership to your LLC at the closing table.
Thanks for your advise.
Now, who can set up a LLC for me, a CPA or a lawyer?
Where can I read more about LLCs?
CPA’s are usually cheaper than lawyers. They charge by the hour and like to use lots of words. No offense to any attys out there reading this!
I usually charge the state fee plus $150. For this you get the LLC, Management Agreement, taxpayer ID number, tax election and free advice.
Mark Wagner, CPA
Mark,
I didn’t know CPA can set up LLC. I have 11 rentals, all still under persoanl
name. I know I need to set up LLC for asset protection. I had RE attorney give me advice to set up 3 o4 different LLC for my 11 Rentals. Is that nesscessary to have so many LLC. How much would that cost? If I go with attorney or CPA? I am in Texas
He is correct. With that many properties, you should have multiple entities. Remember, EVERY asset within a single LLC is at risk from an event occuring as ANY single one of them.
For example: An LLC has 3 properties. Tenant slips and falls due to the water leak that you were negliglent about getting repaired. You are sued and lose. Any and all of that LLCs assets are available to satisfy that judgement, putting all 3 properties at risk.
Of course, the gold standard would be to have each property in its own silo. There are other protection stragegies available as well including making sure that all of your properties are mortgaged - even if it’s to another LLC that you own (the mortgagor would have first rights to any properties foreclosed upon) and various trust arrangements.
Email me offline if you need more info.
Mark Wagner, CPA (TX)
Mark, would you happen to be anywhere near the Dallas area? Or have some kind of website I could contact you at? Thank you.
-Derek Williams
Dallas, TX
You can message me or send a private email through this site.
M
Mark,
where does the trust arragement fit in the LLC scheme?
place the property in trust and take title in the trust with the LLC.
I can only do the LLC part (shameless plug – well…plus tax and bookkeeping work ). Da Wiz can probably give you more (and better) advice on the trust arrangement.
NOBODY should own property as an individual. The LLC is cheap, easy and solid. Adding a trust arrangement makes it bulletproof, but at more cost and hassle. As with everything, it’s a cost/benefit calculation.
M
sorry to ask you questions but i m so new to this and just want to make sure what is really going on. Please forgive me
Here I go:
1)you said “place property in trust, take title in the trust with LLC”, does this mean the property is owned by trust and LLC ? I
2)how cheap is cheap for LLC ;). Are you referring to setup fees ? what’s the supposed fee ? ($150 ?)
3)which trust company do you recommend ? are all trust company non-profit ? how do you verify it is non-profit ? what happens if it goes bankrupt ?
4)is it better to get self directed IRA or IRA LLC where one can write his or own checks to pay for expenses?
Wiz, jump in here anytime!
I believe the plan is to purchase property, deed it over to the trust (transfer ownership) with the LLC as beneficiary of the trust. I’m sure da wiz will correct this if I’m wrong. I understand the basics, but I’ve never actually “done” one.
A Texas LLC is $300. I don’t like to plug myself here, so email me offline for more info about fees and what you get.
I have no information.
I’m not sure what you’re trying to accomplish here, so I’ll just be generic. A self-directed IRA can invest in a variety of things except coins, collectibles and your personal residence. It can also own stock in small corporations and interest in an LLC. As such, it gives you the opportunity to do all of your investing in a tax-deferred or tax-free “wrapper”. Although, you can’t take any proceeds personally, it gives your retirement plan a turbo-boost.
I would envision an IRA with a membership interest in an LLC, which is the beneficiary listed above. This is twisting the tax codes to the limit, but I don’t think there’s anything in this scenario that would break it. But it may be overkill. Would the IRA ownership of the LLC invalidate the need for the trust? Hmmmm…I’ll have to think on that.
M
Thanks Mark for your expedited replies
I guess I dont like to be controlled and beg for $$ from the IRA custodian when it’s actually mine ;).
I gave it some more though . I wonder if the trust company file bankruptcy, what will happen to my retirement account ? I dont like my $ supply to be cut off when i m old and unwanted in the market
as for begging…well, that’s the price of a self-directed IRA. The price for not following the rules is higher.
it’s still “your” money; they only administer your account. so your funds aren’t at risk. I could see some delay in getting to your money, but most of these companies have been around for a while.
given your risk of dying in a car crash today, market risk, timing risk, inflation risk, I would think that risk of administrator bankruptcy is pretty low.
Hi Mark:
Question:
What are the tax advantages and disadvantages in structuring the LLC like a C corp or S corp?
How simple is it to change the structure of the LLC from a ‘Sole Proprietorship’ to either a S or C corp?
dlmcgill
Hi Mark,
Yes, the LLC will protect your personal assets, but will leave your real property exposed to liens and encumbrances as it remains partitionable. Place each property into a land trust, then assign your beneficiary interest to your LLC. You are now very solidly protected and shielded from actions associated with any party’s past bankruptcy; creditor claims and civil judgments; litigation in marital dissolution; probate actions, and even state and federal income tax liens. Good luck to you.
Da Wiz
Since there is no tax law for “LLC”, the IRS lets you choose how it will be taxed. There are only two tax codes: corporate and individual (S-corp and partnership are provisions within the individual tax codes).
An LLC with only one member can choose between corporate and individual taxation. LLCs with more than one member can choose between partnership and corporate. You can further choose corporate taxation between S- and C-Corp.
Advantages and disadvantages. This is just a general outline; there are many more nuances than I can cover here.
Corporate: generally a lower tax rate than individuals and avoids self employment tax. However, to get cash out of a corporation, it has to declare a dividend or distribution of income, which is taxed again at the personal level (the infamous “double taxation” issue). For this reason it’s not preferred for any investment that spins off cash to the owner.
S-Corp: income is taxed at the higher personal rates of the owner(s), but is NOT subject to self employment taxes IF the corp pays the owner a “reasonable” salary. Distributions from profits are taken tax free. However, this comes at a price: the hassle of dealing with the payroll taxes monthly or quarterly. Passive losses pass through and may be limited.
Both C- and S- Corp: receive some additional benefits such as being able to offer benefit plans to employees, etc. Conversions or exchanges of property or investments may be considered a sale for tax purposes, triggering gain.
Partnership: income is taxed at the higher personal rates of the owners. income may be further subjected to self-employment taxes if the owner is authorized to contract on the LLC’s behalf or works more than 750 hours for the LLC. No further tax on distributions of income. Passive losses pass through and may be limited.
Sole Proprietor or “Disregarded Entity”: so named because the IRS “disregards” the LLC for tax purposes. This has no effect on liability protection; it is only a tax decision. Taxed at the owner’s personal rates. generally subject to self employment taxes. No further tax on distributions. Passive losses may be limited.
I’m sure I’ve left out some things; as I said, there are many other factors (is the member a manager, guaranteed payments, etc. (Dave will let me know where I’ve messed up!)
Changing your tax preference can be done, but there are restrictions: Only once every 5 years and it requires IRS approval. This may have changed.
what about limited partnership ? why is this less preferrable than land trust ? the only the reason i could think of is land trust hides the owner name from public record