I live in a very rural part of Fl. and I’m having a hard time getting anybody to agree on the answer. In previous years I have worked full time and invested on the side in long term rental properties by purchasing vacant land, building a house or duplex, renting them for at least 1 year(usually more) and then selling. I do this all in my personal name.
Recently, in this past year, I became unemployed and am now looking at doing this full time—only now I’m interested in building(no contractors license, I pay a contractor to pull) and selling right away instead of waiting at least 1 year. Will this put me in danger of becoming a “dealer”? Should I form an LLC, S-Corp or continue on my own? If so should I just continue doing the long term investments? It is only me–no employees to hire. Should I purchase my other rental properties with the LLC? Since I will be buying a large truck(over 6500lbs) for work can I use the LLC instead of personal? Will the LLC quick flips be viewed differently then my long term?
On a seperate issue, the Contractor I mentioned earlier has offered me a deal to split any profits(not half of his total business)50-50 on any customers I bring to him to build. How would this be filed on my return? Do I use the LLC, personal? Sorry for the long post but I can’t find anyone to agree on the answers around here ???
My suggestion is always holding over flipping. To avoid dealer status you can put your properties in a land trust, then triple net lease them and make a nice monthly positive cash flow on each one. You therefore are selling beneficial interests in personal property, not real property.
After placing your property in trust, I would take title in your LLC which will protect your personal assets as well. Only real estate may be placed in a land trust. Good luck.
Mr Wizard,
Please explain triple net lease? Sounds like another language to us neophytes!
Thanks,
mike
Hi Mike,
A triple net lease is a lease in which the tenant is to pay all operating expenses of the property so that the landlord receives net rent, frequently used to mean tenant pays taxes, insurance, and maintenance in addition to normal operating expenses.
You will be a dealer to real estate for each property sale under this strategy. There is no stigma to being a dealer to real estate – in fact under this scenario, we just call you a land developer.
It does not matter how long you have held the property prior to the sale, each sale will be treated by the IRS as a dealer disposition. There are limits on the tax treatments for dealer dispositions, and your property is dealer realty. Namely
[]All profit due on a sale is taxed as ordinary income in the year of the sale.[]You may not take the installment sale tax treatment, even if an installment sale is used to facilitate the sale.[]Dealer realty can not partidipate in a 1031 exchange[]Dealer realty can not be depreciated
Should I form an LLC, S-Corp or continue on my own?A land development activity as you propose should be done from within a suitable business entity. You want a business entity for the legal and asset protections it affords. Different business entities also provide different tax treatments and have limits on the deductibility of certain business expenses. If you will need major medical insurance, will need to fund a retirement plan, will need to purchase "keyman" life insurance, then a C-corp may be best for you. If you have all these lifestyle needs already from other sources, then the S-corp or LLC may prove adequate.
You really need to consult with a specialist in entity structuring, your attorney, your estate planner, and your accountant/tax advisor to determine which business entity best meets your requirements for your business strategy. There is no single, one-size fits all answer to your question. Without really knowing you, your finances, and your other life needs, the only answer we can confidently give you right now is: “It depends.”
Should I just continue doing the long term investments? Should I purchase my other rental properties with the LLC?It is usually a good idea to segregate active income activities from your passive income activities. You might consider an S-Corp for your land development business, and, an LLC for your rental property business. Keep separate books, even separate bank accounts for each business entity.
The pitfall you want to avoid is “tainting” your investment property sales by conducting all your activities from within the same business entity. When you do this, the IRS looks at your business, determines that the preponderance of your sales were dealer dispositions, so therefore, all of your sales from within the business are dealer dispositions. Your investment sales will be denied investment tax treatment – no capital gains tax treatment, no 1031 exchanges, etc.
On a seperate issue, the Contractor I mentioned earlier has offered me a deal to split any profits(not half of his total business)50-50 on any customers I bring to him to build. How would this be filed on my return? Do I use the LLC, personal?Again, I suggest you consult an attorney who specializes in business entity structuring. Depending upon the details of the arrangement with the Contractor you may want to explore a joint venture agreement.
Also, depending upon the details of the arrangement with the Contractor, you may be acting in the capacity of a real estate broker for which a real estate license will be required. Your attorney is in the best position to advise you further.
Could you elaborate a little further. Alot of experts I’ve spoken with says this doesn’t add up. If I purchase a vacant piece of property, I should then put it in a land trust. Then after I build a duplex or home I triple net lease it. At what point would the LLC take over and how much would all these closing fees and retitleing cost, recording, doc stamps etc…Thanks. PS —as far sa the triple net lease—if I, the LLC or land trust own the property then how does the leaser become resposible for the property taxes? I would be recieving the tax bill–correct?