Avoiding capital gains tax when flipping houses
Hi,
I would really appreciate your input as to how I can avoid capital gains tax or high tax when flipping houses. We do have a corporation and an LP set up. Would a Land Trust be the answer? I do not want to be considered a dealer.
Thank you. 
[addsig]
yeah..I too am wondering about the tax ramifications on flipping..any cpa's out there that can shed some light on this?
flintstone and cmon101,
Whenever you sell a property you have a taxable event -- regardless of whether you used a business entity. When you quick flip property, your profits are taxed at the same tax rate as your ordinary income.
Bill Bronchick (check the Legal Forum) strongly recommends using separate business entities when you are both flipping properties and holding investment rentals. He suggests using a C-Corporation for flipping activities, and a LLC for your long term investment holdings. Separate business entities keep the activites in your "flipping" business from tainting a sale you may have from your rental business. Suggest you visit the legal forum for a more thorough discussion of this topic.
The tax code does not label an individual as a dealer, so you don't have to worry about being "considered a dealer". What you do need to be concerned with is the character and substance of your flip transactions. Generally, the IRS views flip transactions as the sale of "stock in trade", as as such the transaction is a dealer disposition. Property sold in a dealer disposition is not allowed to participate in a 1031 exchange, the taxpayer is not allowed to take a depreciation expense, and ALL of the profit on the sale is taxable as ordinary income in the year of sale regardless of your actual holding period. Even if you sell on a Contract for Deed and are receiving your profit in installments, you are still taxed on your entire profit in the year the property is sold.
Bottom line, all of your profits from your quick flips are fully taxable in the year of sale at your ordinary income tax rate no matter whether you use a land trust or business entity as a title holding device.
You are too right Dave, I would not be too concerned about the taxes. If I am making money then it is my duty to pay my fair share in taxes. Sure you take all of your legal deductions. However, there is no way around paying your share from profits. It is treated as common income.
Dave T,
Thanks so much for your speedy reply. Very Helpful!
Flintstone
does that mean that a c-corp that makes less than 50k per year profit in flipping properties and only pay 15% tax until that money is distributed as a dividend??
Quote:
On 2003-04-02 23:36, gotmike wrote:
does that mean that a c-corp that makes less than 50k per year profit in flipping properties and only pay 15% tax until that money is distributed as a dividend??
Yes. But if there are only passive assets in the c-corp, you have to worry about the accumulated earnings tax and the passive holding company tax rules which effectively force a dividend or cause the tax to rise significantly.
I personally do not use a C corp for flipping properties. I prefer the S corp because the net effective tax rate is much lower than the C corp when you take into consideration the tax cost of the eventual dividend.
Hope that helps,
Taxjunkie
What is to stop me from forming a new company for each deal <$50k, taking advantage of the low tax rate?
Quote:
On 2003-04-09 03:35, dasgeld wrote:
What is to stop me from forming a new company for each deal <$50k, taking advantage of the low tax rate?
The affiliated corporations rule in Section 1563 of the Internal Revenue Code. That section essentially aggregates the corporations that are "commonly controlled" by you to determine your tax rate for each corporation.
Nice try, but Congress thought of an answer to that strategy long ago!
Taxjunkie
I'm laughing.
...Don't you hate it when you think of a really clever loophole, only to find that it's all ready been closed up!
Thanks Taxjunkie
My understanding about a C Corp is that a "Salary" ,not a dividend, of up to 50K
is non taxable to the Corporation and Taxable only at the individual level.
And in regards to Control group status, IRC 1563, I believe:
Doesn't that only apply to C corporations , if so what about
forming an LLC for flipps and electing to be taxed as a corporation?
Jonathan
[quote]
On 2003-04-12 09:53, Jmapp wrote:
My understanding about a C Corp is that a "Salary" ,not a dividend, of up to 50K
is non taxable to the Corporation and Taxable only at the individual level.
A: That is correct, a salary is not subject to the corporate level tax. However, with a salary, you will have to pay 15.3% FICA (social security tax) on the wages up to $87,000 and 2.9% on amounts over that amount, so taking a salary is not as advantageous as using an S corporation or an LLC (however a single member LLC will have you paying the FICA tax is you are earning "self employment" income.
Q:
And in regards to Control group status, IRC 1563, I believe:
Doesn't that only apply to C corporations , if so what about
forming an LLC for flipps and electing to be taxed as a corporation?
A: Yes, it does only apply to C corporations. However, if your LLC elects to be taxed as a corporation (normally a C corporation; but I have made elections for LLCs to be taxed as a S corporation), the tax law views it as a corporation and not an LLC, even though under state law the entity is legally considered an LLC.
So, to answer your question, if the LLC elects to be taxed as a C corporation, it will not avoid the aggregating income concept of IRC 1563 to determine the highest tax rate. Therefore, using multiple LLCs that are taxed as C corporations will not lower your tax rate to 15%.
Taxjunkie
[ Edited by taxjunkie on Date 04/29/2003 ]
TaxJunkie how would you handle this?
I just filled out LLC paperwork with two other men. We gave one person 34% and the remaining 2 people 33% shares. To pay our selves per deal we said we would take 30% of a deal as pay divided via shares percent.
Now, Im getting to the question. We have decided to open other offices in other counties. We want to use the current LLC we are forming to make the additional offices DBA's. These new DBA's would have a new person that we would then leave to run the DBA. When we form the individual DBA's we want the new person to receive say 97% and have the remaining 3 % of each deal come our way into the LLC.? The DBA when formed, does it have to state each persons name that is within the LLC as well as the new persons since the new person is now like a partner or franchisee, or can we just say the LLC and the new person, or do I have this all wrong?
NoticeofDefaults,
This is really a legal question for the Legal Forum. Because this thread is starting to stray from income tax related issues, I am locking this thread.
Please repost your question on the legal forum.