Hi - I attended a 3-day Russ Whitney seminar where they talked about opening up a Corporation for short-term RE investments and an LLC for long-term RE investments. I’m not sure why though. It appears it costs more to set-up a Corporation than it is to set-up an LLC. Can someone explain what the difference is?
Also, the instructor suggested to open these (Corp & LLC) in the state of Nevada. Has anyone done that? How long was the process and how much did it cost? (We live in California, by the way.)
The issue is not where you live, but where the corporation is registered. If the corporation is registered in a state other than state in which it is doing business, then the corporation is a foreign entity to that state. A Nevade corporation that does business in CA, is not a domestic entity in CA, but rather a foreign corporation to CA.
Most of the time, when you have active income from real estate, such as property flipping, you want that income to be earned in a corporation, probably an S-Corp. An S-Corp avoids the double taxation on income that you would have with a C-Corp, but some or all of your income is subject to self-employment income tax treatment.
When your real estate income is passive income, you want that income earned in an LLC (either partnership or disregarded entity) so the tax benefits from the passive income will flow through to your personal 1040. Passive income is not subject to self-employment income taxes.
The reason to have separate business entities when you are engaged in both active income and passive income real estate activities is that you don’t want the sales from your active income activities – dealer dispositions – to taint any sales from your long term portfolio. By segregating your business activities you establish a firewall between your dealer dispositions and your investment property sales, so the IRS does not lump all your sales together and treat them all as dealer dispositions.
By the way, an LLC can elect to be treated for tax purposes as a corporation.
Hi, Dave T, I plan to a real estate transaction that involves acquistion, rehabing then selling… My inquiry is one
If you are planning to aquire, rehab then sell quickly, I guess the S-corp or the LLC tax as a corporation is the most effective entity in regards to taxation
Also, the plan is if the property is not purchase in a certain time frame by a buyer due to slow market conditions I will plan to perform a refinance and rent the property or lease option the property for the duration of one year. If I elect to go this route, would it be better to structure the LLC as a partnership in this scenario
Is the rule if you going to flip a property to form a S-corp but if you plan to buy refi, and hold you should create the LLC taxed as a partnership
thank you Dave T, my concern is that if I set up an S-corp and during the durationg of keeping the property my real estate strategy changes from a flip to a buy and hold is this going to complicate issues with the irs???
Might. The problem is when the preponderance of activity in the business entity is dealer activity, then the occasional investment property sale could be treated by the IRS as a dealer disposition also. When this happens your profit is taxed as ordinary income rather than as a capital gain.
To keep your dealer activities from tainting your long term investment property sales, it is better to segregate your activities with two different business entities.