Corp. For Rehab???
My main interests in REI are in rehabbing and buying subject to/ selling on lease options. I also would like to hold some properties for cash flow long term. Would it be best to form corp for the rehabs and use an LLC for the rest. I've heard it can make a big difference on tax savings to use corp for www.rehabs.Is it that big of a difference where it's worth the hassle of running a corp. <IMG SRC="images/forum/smilies/icon_confused.gif"> [ Edited by McMadhouse5 on Date 03/17/2004 ]
I just found an archive article supporting using an s-corp for wholesaling and rehabbing and an LLc for long term. I guess I should've checked there first. I wonder though about the ones you are gonna hold for a year or 2(untill your tenant cashes you out). What entity should you hold that in?
You hold that property in your dealer entity.
Ok, my question would be, Can you be both an LLC for long term properties and a "S"corp for the short stuff like flipping?
Also I recently read that as investors we should buy all property under a "Land Trust" for Identity protection and Liability. Did I understand that correctly?
Thanks in advance,
642freedom
Going along with the LLC's for Holding and S-corp for wholesaling...
If I were to purchase Subject-to and sell it using lease-purchases - which entity should I use? DaveT - you thinki its better to hold this in a s-corp?? Why is it better to hold these in an S-corp, when you are likely going to be cashed out in 2 years or so?
Thank you,
Matty Kling
Quote:If I were to purchase Subject-to and sell it using lease-purchases - which entity should I use? DaveT - you thinki its better to hold this in a s-corp?? Why is it better to hold these in an S-corp, when you are likely going to be cashed out in 2 years or so?Matty,
The question about which business entity is best for you should be addressed by your tax advisor, your CPA, and your estate planner. There is no single correct answer to your question.
In general, it is better to hold your long term rental property in a business entity that is different from the entity you use for your flip activity. Yes, buying Subject To and selling on Lease Option is a flip (in IRS terms, a dealer disposition).
You want to segregate your dealer dispositions from your long term rental property activities to preclude having your dealer activity "taint" a sale of your long term rental property. Capital gains tax treatment applies to the sale of your long term rental property, while your flips are taxed as ordinary income and your flip profits are also subject to self-employment taxes. If your sales are tainted, then all sales are treated as dealer dispositions.
Using an S-Corp gives you some opportunity to allocate a portion of your profits to a reasonable salary (and pay the self-employment taxes) while the rest of your profit can be taken as a dividend. S-Corp eliminates double taxation issues that you encounter with a C-Corp. Just some rationale behind the S-Corp recommendation. Caution -- if you don't take a "reasonable" salary, the IRS will recharacterize all of your net profits as salary and recompute your self-employment income.
Thanks DaveT,
New question arises. If subject-to, and then leased/option is a flip (cause you sold the property) then is it still considered a sale if the tenant/buyer doesn't exercise their option to buy and vacates after a year? You know how it works. And then you get another tenant/buyer the next year...and so on.Still considered a sale each year you do that on the same property? Or would that senario then be considered a long term rental by the IRS?
Thanks
642freedom
What is it that makes a lease/option situation dealer property? I can see that if you're playing it very conservatively you would say that it's dealer property but it doesn't seem aggressive at all to consider it investment property.
After all, you are holding it for investment purposes (appreciation (especially if an escalation clause is built into the agreement) and cash flow) and not exclusively holding it only in an effort to sell it.
Maybe a better question is.....how then would you modify a lease/option in your opinion to make it a non-dealer situation. Make the term longer, shorter? Build in a price escalation clause? Make it so the person can't execute the option for 24 months or 36 months or longer?