So even in an LLC if you leave all the income/profit in the LLC's account you still have to pay income and SE taxes?
Yes, if it’s being taxed as anything other than a C-corp, which will never pay SE, but will incur other taxes as you try to access the cash.
Nothing is ever free.
Forms 8832 and 2553
To clarify Mark’s points, you use an 8823 to make an election to have an eligible entity like an LLC treated as a C corporation.
And you use a 2553 to make an election to have treated as an S corp.
Also, I would recommend setting up a “management” corp to run all of your monies through and then pay your self payroll through it on a monthly basis. Also, have your management corp own an s corp that buys flips and another one that owns rentals. Have llc’s that own 2-3 rentals and this will limit your legal exposure. Hope this helps!!
The other problem with all of this “C” to “S” stuff is that via something called the “built-in gains” tax you’re going to pay the top corporate tax rate on any appreciation that occurs during the period the entity is a “C” corporation when you later sell any property that’s been held by the corporation.
Also, the built in gains tax is brutal… If you’re a cash basis tax payer (and most of you are) there’s all sorts of stuff that’s gets taxed as built in gain. E.g., rent receivables.
Ouch. :help
I have heard this is the best way to set it up. But what the Management company be, a S corp??
The management company would need to be either an S corp or a single-member LLC treated as a disregarded entity.
S corporations can only have certain types of owners… in general, US citizens and permanent residents, things that are really close to these “individual” taxpayers like testamentary trusts and bankruptcy estates, and with an appropriate election, other S corporations.
Note that regular corporations, partnerships and foreign individuals can’t own shares in an S corporation.
another thing to keep in mind (beat the dead horse?): an LLC taxed as an S-corp IS an S-corp to the IRS. Thus, a corporation cannot own an LLC taxed as S-corp.
irrespective, go with an LLC and simply tax it as a partnership, C-corp or S-corp. superior asset protection plus the tax strategy you need.
what is the difference between taxing your llc as a partnership or an s-corp?
for my situation my partner and I are looking to do both flips and rentals, and we are 50-50 holders.
in general: probably not much. we can’t give you exact recommendations because we don’t know your exact situation.
be careful using a single entity for flips AND rentals. rental income is passive and not subject to SE. don’t lump it all in together. keep good records.
my situation is that its my partner and I. We are looking to buy flips and rentals.
so in a regular llc rental income even with two people in the llc does not have to pay SE taxes on it?
but for flips in an llc you do?
are there any books that go over the ins and outs of this stuff that are fairly straight forward?
You know what I’d suggest? Call a local CPA and ask to buy an hour of time. Then, bring in your questions and go over them with the CPA.
As long as you get someone who understands real estate and this LLC vs S corp stuff–people often call this “choice of entity”–you’ll get great value for the $200 or whatever you pay for the hour. And now’s a good time to make an appointment because (hopefully) people are done with tax season.
BTW, just so you know I’m trying to be objective about this, I am not angling for this billable hour. I’m not taking on new clients these days.
I have an meeting next week with one that a friend recommended. However, I am distrustful of CPA’s lawyers etc, in the same way I am contractors. I feel like they just want to make their money and be done.
I don’t know what I should be asking when I meet with the CPA to find out how qualified they are and knowledgeable about real estate related things.
so in a regular llc rental income even with two people in the llc does not have to pay SE taxes on it?but for flips in an llc you do?
pass-thru income from an entity to an individual generally maintains its character when passed thru. passive partnership income remains passive to the partners. ordinary income (flips) remains ordinary and subject to SE. some exceptions, but this is generally the case.
How to pick someone? Ask lot of questions. Listen for answers. Watch out for the “one size fits all” and “I have all the answers” mentality. There are lots of options and each of these has pros and cons.
I think with professionals, it’s sometimes not what you pay but the value you get.
In fact, I tell prospective clients that I want them to see me as expensive. But I also tell them that they need to be able to look at the value I deliver and clearly see they get, e.g., a way better return on what they spend on me than they do on just about anything else.
Example: I want them to look at the $2K bill, think, “Geez, that’s expensive…,” then think some more and say, “But gosh he’s saving me around $8K a year.”
I said this someplace else, but one of the problems or challenges in working with real estate investors is that they often don’t pay much in income taxes. Predictably, as a result, they don’t see a lot of value (or get a lot of value) in high-quality tax planning advice. So why buy good accounting?
And before you think, well, why doesn’t some smart CPA figure out how to serve these people, think about this. To be fair, the CPA can often go spend his or her time serving a large multiple state professional services firm and semi-regularly deliver regular tens or even hundreds of thousands of dollars tax savings.