Hello all:
I have been ivesting in real estate the past 2 years as basically renting out homes. I am interested in the rehabbing of homes and to sell quick. Obviously there are tax implications to selling a home you have owned for a month.
Anyone have recommendations on corporation setup where taxes would not be so great. Is there a way to limit the amount of taxes?
flips are taxed at marginal rates, plus SE tax. that sucks.
If you buy/sell inside an LLC, taxed as a C-corp, you will probably pay less income tax and no SE. However, getting cash out of the corp is problematic since it will either be a) a nondeductible distribution taxed again as dividend income to you personally or b) deductible salary subject to income and FICA taxes anyway.
there are basically two other methods to reduce the SE tax;
LLC taxed as S-corp. the income is still subject to regular income tax, but if the LLC can pay you a reasonable salary, you may be able to avoid SE tax on the remainder of the income.
if you do not actively participate in the business, you may be able to declare it passive income and save the SE (limited partnership taxation )
mcwagner, do you work in Austin area, if not do you suggest anyone in the are to do the setup you’ve suggested. thanks.
I’m in Dallas.
What does SE stands for?
self employment tax. the equivalent to employer and employee FICA/Medi.
Mcwagnor does this mean that if the LLC pays you a salary of 500 dollars a month that the LLc will have to pay your taxes (fed, state, FICA etc.) on you?
I know I have been asking a lot of questions but cannot find a good acct. in OKC to help w/ questions. All they want is YOUR money and not really tell you what you can do as far as tax class for LLC. Or which one would be right for an a hold and sell or rehab seller. Any info on how to pick a good RE accountant
Thanks for any input from any one
Phil
yes, paying salary will require payroll tax deductions, quarterly tax returns, SUTA, the whole thing.
Is there any way to avoid paying payrol taxes such as not getting a salary and only taking a profit distribution, inwhich i would guess that it would be put on my 1040? I do not care to pull money out until i become F/T REI. What do I lose by not taking a salary. I am not wanting to add more complication to my life other than fousing on the business.
Thanks
Phil
you don’t “lose” anything.
Since we’re talking flips and rehabs here, this is all ordinary (non passive) income, and you pay income and SE tax whether you take a distribution or not. When you take a distribution, it has no tax effect at all.
what you gain by taking a salary is that if the salary is “reasonable,” you will pay FICA on that salary, but you may avoid paying SE on the rest of the LLC(S-corp) income.
the “cost” of this tax savings is 1) significant hassle: witholding, quarterly returns, W-2, W-3, SUTA, etc. and 2) some extra taxes for FUTA/SUTA. But with SE rates at 15%, if you have significant LLC(S-corp) income, it may be worth it.
Thanks again for all the input!
What is a “reasonable income”? (How much)
I believe you have fulfilled allmy questions on this matter
THANKS!!!
Phil
reasonable is…well…reasonable.
think an employee with similar skills and experience, working a similar job for similar hours in a similar geographic area. With flips and rehabs, what’s a full time project manager make?
I’m sure there’s lots of flexibility in the definition. Personally I’ve not seen it challenged. Maybe Dave T or Hyre have, and can give more insight.
Reasonableness takes several items and pertinent facts into consideration, including but not limited to
[]duties performed[]volume of business handled[]character and amount of responsibility[]complexity of the business[]amount of time required[]cost of living in the locality
It seems to me that these “tests” to determine reasonableness are mainly intended to determine whether or not a salary is excessive.
The amount of the salary deemed to be excessiive will be disallowed as a deduction
For example, if you hire your kids to sweep the floor twice a week, then a salary of $500 per hour is not reasonable, but is excessive when you take the amount of time involved, the difficulty of the task, and the required skills involved. Any pay from 50 cents to $5.00 per hour could be reasonable. In fact, if you usually give your kids an allowance of $15 per week, hiring your kids to do odd jobs (such as stuffing envelopes, emptying the trashcans, and sweeping the floors) for $15 per week still gives them their allowance but makes that allowance a business deduction to your business.
I don’t know that anyone has ever been challenged for taking too little salary (it may have happened, I just don’t know about it). Look at all the corporate CEOs who take $1 in salary (of course they are compensated in other ways such as stock options). How about Elizabeth Dole who took zero salary in her first year as President of the American Red Cross, even though the board of directors approved a salary of $200K per year. I have not heard of any tax ramifications to these businesses when their senior leaders take an extremely small salary.
That said, why not set a policy in your articles of organization that make the manager’s salary commission based with a limit on total compensation. For example, if your business only does two flips the first year, then a 10% commission might represent a fair compensation for the amount of business handled. When the business does 25 flips and nets $250K or more, then having a salary cap of $25K might be reasonable for your business.
Just my layman’s opinion.