HELP! I’m selling my rehabbed home tomorrow afternoon and my CPA advised me that if I don’t restructure the deal it’s going to cost me an arm and a leg in taxes by putting me in a new tax bracket since i am personally on title, not my C-Corp.
He strongly encouraged me to QC to my C-Corp then sell it from my C-corp to the individual buying it. However, I can’t do that because the buyer is financing using FHA and they can’t see the title change prior to closing or they won’t fund.
The alternative, I was told, was to make an agreement between my C-Corp and myself personally prior to closing that allowed my C-Corp to earn the profit from the sale rather than me personally. They could put it on the HUD and it would make a stronger case to the IRS that i didn’t earn the money.
The only problem is, I don’t know what to write! My attorney is “too busy” to draft one for me before closing and my CPA says he can’t offer legal advice. I’ve even called other attorneys who seem to be clueless.
Can anyone here give me a legal and IRS-Friendly way to write this type of agreement up?
FYI, the sales price is 83k, my loan was for 43k so it’s a pretty big chunk of money for me.
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I’ve never heard of such an agreement. I doubt that such an agreement would be honored by IRS, since it violates the character of the transaction: you own the house, you sell the house, you pay income tax on the sale. The corp “doesn’t have a dog in that hunt.” Giving away income just to evade taxes is called “tax evasion.” In my opinion, any CPA that is suggesting that you create such an agreement is suggesting fraud.
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Rehabs go on Sch C. Since they’re on Sch C, what other real estate business expenses do you have that will offset some of this income? It’s not just the tax bracket, but also the self employment tax. Rehabs are NOT capital gain.
2a. The amount of the loan is irrelevant. Purchase price minus rehab costs & other business expenses = income.
2b. Be sure that you have captured all of your rehab expenses. Utilities, taxes, closing costs, insurance, tools, supplies, cell phone, office supplies, business cards, etc. These all go on the Sch C and reduce that rehab income. This is a “real estate business,” not a “sell one house” business.
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What are you doing with the C-corp? Yes, the C-corp will have lower taxes today, but you’ll never be able to get the cash out of the C-corp without paying dividend tax in addition to the corporate income tax (dividends are not deductible to the C-corp). So unless you have some other business in the C-corp, I can’t see how this would help.
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Pay the tax. You still get to keep ~45% of the cash after expenses and taxes. That’s a good problem to have.
The C-Corp was only recently formed for the sole purpose of being the rehabbing company side of my business. I also flip wholesale with my LLC. I want it to be a separate entity so that my personal GROSS and NET income are not too much (I have personal, not tax reasons for this), even though it would otherwise go on schedule C.
Even with an agreement we would STILL put the closing on my schedule C this but we want it to be written as an 100% expense for me personally. I’m willing to pay the dividend the C-corp and all the other consequences of having a C-corp in order to structure it this way.
Since the C-corp is recently formed, i still need to fund it somehow so that the C-Corp can stand on its own and buy, fix, and sell more properties in the future. This seems like a perfect opportunity to get the C-corp the money it needs to do the next house.
Do you have a suggestion on how to better fund the C-Corp? Would you do it outside of the closing?
Your OP stated:
if I don't restructure the deal it's going to cost me an arm and a leg in taxes by putting me in a new tax bracket
which made taxes the priority, not “other personal reasons.” Make up your mind.
Even with an agreement we would STILL put the closing on my schedule C this but we want it to be written as an 100% expense for me personally.
so, am I understanding that you want all of the expense on your Sch C, but all of the income taxed in the C-corp?
I appreciate any constructive criticism you can offer–that’s why I’m here, but please be patient. The “priority” i suppose is for personal reasons.
I want both the income and expenses on my C-Corp from now on, because I want the C-Corp to grow and operate completely on its own. However, on this particular deal I’ve already incurred the expenses on me personally so that cannot change. I had a hard money loan that covered most of the expenses though including all the rehab costs. Yes, I do want as much of the income as possible from the transaction to go to my c-corp.
I do want as much of the income as possible from the transaction to go to my c-corp
It’s either business or it’s personal. It cannot be both.
However, on this particular deal I've already incurred the expenses on me personally so that cannot change.
This is a personal transaction and goes on 1040 Sch C.
I had a hard money loan that covered most of the expenses
This is irrelevant. The source of the cash you used for the rehab does not matter.
Sales price - purchase price - minus cost of rehab - business expenses = taxable income
I"m certainly willing to pay taxes… One thing I forgot to mention was that I bought it into an LLC, then my homeowners insurance made me QC it to me personally in order to insure it. Does that help make it any less personal income and more business income?
If you have a single member LLC it goes on your 1040 Sch C either way.
It does nothing to put it in the c-corp.
Caution!!! Your corporation better have a proprietary interest to receive proceeds! If, in fact, the corp has an interest, you need to read the tax laws about transferring the title, etc.
If this were one of my deals and a corp had an interest to receive proceeds where the corp did not have title, then I would have an agreement with the corp as well as an invoice for those proceeds at the closing and then the closing agent would put that invoice on the HUD 1 for the proceeds to be paid direct.
The laws and rules are piling up and you need to learn them before you do deals rather than after.
I hope this helps.
Rob