Anytime you hear the words “LLC” and “tax” in the same sentence, beware of someone who doesn’t know what they’re talking about.
There is no tax code for LLC. So you will either have to tax it as a partnership, C-corp or S-corp.
From the IRS perspective, the LLC IS a partnership, C-corp or S-corp. LLC is purely a liability protection construct of state law. It has nothing to do with the federal tax code.
So there is nothing about an LLC that will in any way impact self employment tax (or any other tax) in and of itself.
Rental income is always passive and not subject to self employment tax, irrespective of what type of entity holds the property. Flipping income will always be ordinary income subject to self employment tax, again irrespective of what type of entity holds the property.
Whether you use an general partnership or an LLC taxed as a general partnership, the key is the partnership agreement. You need to decide on EVERYTHING up front and PUT IT IN WRITING.
who’s gonna do what and who’s gonna get what in compensation. Who’s gonna go when the water heater goes out at 2 am. Who’s gonna pay when the roof leaks and you have to fund the entire repair because his daughter’s getting a $40,000 wedding. What’s gonna happen when he dies and now you own a property together with his widowed wife who has remarried a mobster. What’s gonna happen when he gets divorced and his wife’s atty sends you a letter that ties up your half of the partnership in court. What’s gonna happen when you’re ready to sell because you’re fed up dealing with snotty tenants and a deadbeat partner and he doesn’t want to. What’s the exit strategy? Who’s gonna pay the mortgage when it’s been vacant for a year and the house is about to go into foreclosure? When it gets foreclosed, and you can’t sell because it’s underwater, who signed the personal guarantee with the bank?
Yep, I’ve seen all this happen.
Decide in advance. PUT IT IN WRITING. Always and I do mean always have an exit strategy, and a plan B, and a plan C. Plan D doesn’t hurt, either.
If you want liability proection, look at an LLC. However, if you’re going to be managing the property yourself, the LLC will not protect you from your personal actions (negligence), so just use a partnership (no state registration required in most states). Even if you just jointly own the property, you’ll have to split it to get it on your personal tax returns anyway, so it makes no tax difference either way.
Jointly owning property may come with some legal risks I’m not familiar with. I’d talk to an atty before jointly owning property with someone. But that’s me.