I wanted to knowbefore I file any paperwork to start my business. What should I file as an S-corp or an LLC.
- What taxes do I have to pay once I flip a property?
- Which entity is better as far a taxes concerned?
corporate stock is considered an investment. as such, it is available to satisfy judgement creditors in the event you are sued and lose. so when you rear-end the lady in the Pinto, it explodes, her kids sue you personally and win, they can gain ownership of the company that owns the property.
LLC membership, on the other hand, is considered personal property by statute. As such it is not available to satisfy judgement creditors. Now when they sue they may get a judgement and charging order, but they cannot gain ownership or control of the company that owns the property, putting you in a much better position.
both the corporation and LLC protect you from liabilities arising within the entity, but only the LLC protects the company from your personal liabilities.
In addition, corporations, including S, come with much more hassle: annual meetings, resolutions, etc.
You can have the LLC taxed as a C-corp or S-corp thus gaining the superior asset protection of the LLC along with whatever tax strategy benefits you most.
LLC all the way.
Flips are considered ordinary business income (the houses are “inventory,” not “investments”) subject to income tax plus SE.
So does that mean if I do 400k in income which puts me in the 35% does that mean taxes will eat up 50.3% of my profits plus realtor commision ,etc.
Yes, you are exactly right! 50.3% in your case! (35% income tax plus the 15.3% self empl tax) Gotta love the IRS!
What if he held them as rentals before selling?
If you hold as a rental for over a year, you will pay 15% Capital Gains plus a Capital Gains recapture for depreciation in previous years (whether you took the depreciation or not)…
Keith
Forgive my ignorance Keith, I should know this at this point…but the truth is …I do not.
So…to flip, and actually have the best of both worlds, to hold for one year as a rental, is the most cost effective way to flip?
Capital Gains ( 15%) would be the only charge of taxes? That would sure beat my tax bracket. Or is it CG + other taxes, like SE or anything?
I guess my question is, what time frame should I hold a house to pay the least ammount of taxes? One year and one day? I just got my first house rented, and I am about to purchase another New Orleans home, and want to do it the most cost effective way for profit…even if it means holding and renting before selling.
Thanks a ton.
Steve
If your intent from the beginning is to flip the property, then it does not matter how long you have held the property. Flip property is inventory, not investment property, so the profit is always taxed as ordinary business income.
If you want to avoid capital gains taxes on property you really intend to hold for rental income, then don’t sell. If you have some compelling business reason to remove a property from your portfolio, use a 1031 exchange to defer capital gains taxes and depreciation recapture.
My intent is to rent them, for at least a year. If I can make it work, I would like to rent them for as long as possible…but I know I will also be willing to sell after renting if the prices are right, and if I could use the money.
Pardon me, but it sounds like your intent is to flip. Your plan is to hold for a year to make your profits capital gains instead of ordinary income.
If I have it right, this pattern of activity is still acting as a dealer to real estate. Sooner or later, the IRS will catch on. When they do, all your sales will be recharacterized as dealer transactions, all your profits will be deemed ordinary, self-employment income, and all your prior year tax returns will be recomputed with back taxes, penalties and interest included in your bill.
If you are going to buy and hold, be an investor – plan to hold indefinitely. Do it right from the beginning and you will never run afoul of the IRS.
My main priority is rentals. I have a job already. If I buy 5 houses a year, and rent four of them, selling only one…then what? Or what if I sell one every two years or so? I can see at some point having a rental or two that is more trouble than it’s worth, and wanting to sell it. That doesn’t mean I bought it to sell it, just that current circumstances make selling at that particular time make more sense. Then what is my pattern of activity? Renting, renting, renting, one after another…tehn BAM, a sale. Seems to me my pattern is renting? Correct?
Well, now it would appear that you have crossed the line from flipping for profit to holding for the production of income. You have crossed over from dealer to investor.
As long as your primary intent when you purchase is to hold for the production of income, then you take the appropriate capital gains tax treatment when you sell.
The IRS understands that some investment properties don’t work out or that you may have some compelling business reason to sell.
Thx.
I’m self employed, so rentals will be my retirement. Again, I appreciate the repsonses.
Steve