My very basic questions are these-
1.Do I pay capital gains on my first flip if I haven’t set myself up as an enitity (S-Corp or LLC)?
2.Once I do set myself up as one of those entities and I purchase properties under the entity name is it automatically considered earned income or is there some other qualification?
All the threads I read stress to not intermingle personal and business funds. So if I were to set myself up as an LLC and plan to get a secured loan against personal funds does that mean I get the loan in the name of the LLC and that keeps things kosher?
I apologize if I’m asking a question that has been answered a million times but I searched the threads back several pages until I gave up and decided to ask.
1.Do I pay capital gains on my first flip if I haven’t set myself up as an enitity (S-Corp or LLC)?
No. The profit you earn on flip property is ordinary income. If done outside a business entity, then you are acting as a sole proprietor. Your income will be subject to ordinary income taxes and self-employment income taxes.
2.Once I do set myself up as one of those entities and I purchase properties under the entity name is it automatically considered earned income or is there some other qualification?
I income earned by your business entity is determined by the character of the income itself, not by the presence or absence of an entity. Income from a property flip is still ordinary income. Income from rental property activities is still passive income. Mark can elaborate on this point better than I.
3. All the threads I read stress to not intermingle personal and business funds. So if I were to set myself up as an LLC and plan to get a secured loan against personal funds does that mean I get the loan in the name of the LLC and that keeps things kosher?
Personal funds are not LLC funds. A secured loan in the name of the LLC is secured by assets held by the LLC, most likely the real estate owned (or to be purchased) by the LLC. If your LLC has no credit history, you may be asked to personally guarantee the loan, but, you are not pledging any of your personal assets to secure the loan.
re: #3. well, you might be asked to pledge personal assets to guarantee the LLC loan. Sometimes cosigning works like that. However, it does not change the nature of the relationship between the individual and the entity.
I can cosign a loan for Dave, but I will never BE Dave.