dealer or not, flips are always ordinary income, subject to income and SE tax. always.
let me say that again for those that are not paying attention:
flips are always ordinary income. never capital gain.
to take capital gain and be eligible for 1031, the property must be held for investment (rental, unsold parcels of land you developed, etc). the key here is that if you intend to resell it, it is not held for investment. if you intend to resell it, it is inventory.
Now, what complicates things is that if you both flip AND rent properties, the IRS can attempt to classify you as a “dealer.” This means nothing more than your rental efforts are merely incidental to your greater flipping business. The solution here is to keep good records: copies of advertisements, rental applications, tenant interview notes, property management agreements, anything that substantiates that you intended to rent the property. Facts and circumstances supported by documentation will avoid having the IRS reclassify a property sale as a dealer transaction, which preserves the capital nature of the transaction.
Setting up a corporation can be useful to keep your flipping business seperate, but is not perfect: you have to know up front how you will dispose of the property. Suppose you buy a home in the corp with the intent to flip it, but it doesn’t sell or not at your desired price. You end up putting a tenant into the property for two years. Now what do you do? You have a rental in your “flip” corporation. Suppose you buy a rental, but a buyer makes you an offer you can’t refuse? Now you have a flip in your rental business. Uh oh.
Neither will a corporation magically save you taxes. business expenses are always deductible irrespective of whether it’s a corp or a Sch C. Likewise, assuming that you take a salary for the full amount of profit, all that salary is subject to the same FICA and Medicare load as paying SE tax on a Sch C, so you don’t save anything there. If you leave the profit inside the corp, you pay the corporate income tax, plus a 25% tax on dividends if you take a distribution from profits. That may end up costing you more in taxes than the Sch C.
You can usually put away more tax advantaged retirement funds with a SEP than a corporate 401(k), although those differences are fast disappearing.
Then you have the additional hassles of dealing with the entity (no comingling)…
A corporation is a valuable tool and has many advantages. Saving taxes is generally not one of them.