Assuming I would be fortunate enough to flip 50 houses this year, what would be the best way to avoid dealer status? Should I set up an extra LP to put them in?
I know you already saw my response when you posted this question in the Tax Strategies Forum. For those visitors in this forum, I will repeat my answer.
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 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.
The tax code does not label an individual as a dealer, so you don't have to worry about "dealer status". 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", and 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 a business entity as a title holding device.
[ Edited by DaveT on Date 01/15/2003 ]
Check out some of the articles on benefits of different legal structures. If setup correctly, C-Corps can offer not only tax benefits on income but also liability protection.
To think of it another way - a person who holds a job, gets paid a wage then taxed then gets to spend what's left. Whereas a C-Corp gets paid, spends what it needs to on various expenses (supplies, health benefits, expenses, etc.) and is taxed on what's left over!. Are some of those benefits sinking in?
(to finish your sentance) and then is taxed again once the try to take the money out. Meet with your attorney and your accountant in the same room. That way you can save money on the bill...
The taxation issue of a C-Corp is what makes your argument flawed. You can do the same under different structures. What you do not understand is for example. If I buy a property for $100,000 and spend $6,000 on rehab + $5,500 for Commission and Tile Ins. You are into the property for $111,500. With me so far. Say you sell the property for $145,000 NET. Your C Corp profits $33,500 OK. The C Corp owes 15% in taxes of the 33k profit once you try to take the 33k out of the C Corp you are taxed again personally based on you personal taxable income level.
Are you starting to see your problem? Plus if you check out the tax laws C Corps pay a higher tax rate than individuals on a per dollar basis over $46,700. Plus the person is taxed again when they take the money out. = 2*
I hope you can see where I am going with this. C Corp equals double (2) taxes. I don't see the benefits you thought you were describing. You have confused an S Corp, LLC, LLP, Limited Partnership or General Partnership with a C corp. I do not believe that a C Corp relieves you of all liability. It helps, but just ask a doctor over the age of 55 what happened with liability and his old C corp.
Then whey you go to unravel the C corp. they are screwed with taxes due on accounts receivable and aging.
One reason for using a S or C Corp for flipping is so you don't have to pay self employment tax on some of the profits, whereas, an individual or LLC, pays self employment taxes on all the profits. SE tax 15.3%. This can save you alot of money on taxes if done correctly.
Look into the pros and cons of a S Corp vs C Corp. S Corp doesn't have double taxation, but C Corp offers more tax write off benefits.
Do a web search or consult a professional to find out which type of corporation fits your business the best.
Double taxation with a C corp is not a given. What many small business owners do with their C corp profits is bonus them out (to themselves) at the end of the company's fiscal year. You have to be a little bit careful to not have the payout considered a dividend because that would be taxed at the Corporate rate. This distinction is set in your articles of incorporation and by the type of business you have. I have had a engineering consulting C corp for three years and bonus the money out every year with no federal taxes due. There are some states (CA included) that make you pay a set state tax no matter what you have done with your assets/profits, but it's not too onerous($800/yr in CA).
As with much of the advise herein 1) it depends on your objectives and the type of deals you will be doing and 2) you should talk with your accountant and likely a Real Estate lawyer. Talk with the accountant first...the taxation implications are the most important issues.
i heard talk of using a c-corp to flip properties and LLC to hold... ask your local professional
flintstone,
I know you already saw my response when you posted this question in the Tax Strategies Forum. For those visitors in this forum, I will repeat my answer.
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 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.
The tax code does not label an individual as a dealer, so you don't have to worry about "dealer status". 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", and 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 a business entity as a title holding device.
[ Edited by DaveT on Date 01/15/2003 ]
Thanks Dave,
It's starting to sink in!
DavT:
So why do a C-Corp with the flipping property I just don't understand the benefits...
Thanks
Check out some of the articles on benefits of different legal structures. If setup correctly, C-Corps can offer not only tax benefits on income but also liability protection.
To think of it another way - a person who holds a job, gets paid a wage then taxed then gets to spend what's left. Whereas a C-Corp gets paid, spends what it needs to on various expenses (supplies, health benefits, expenses, etc.) and is taxed on what's left over!. Are some of those benefits sinking in?
(to finish your sentance) and then is taxed again once the try to take the money out. Meet with your attorney and your accountant in the same room. That way you can save money on the bill...
The taxation issue of a C-Corp is what makes your argument flawed. You can do the same under different structures. What you do not understand is for example. If I buy a property for $100,000 and spend $6,000 on rehab + $5,500 for Commission and Tile Ins. You are into the property for $111,500. With me so far. Say you sell the property for $145,000 NET. Your C Corp profits $33,500 OK. The C Corp owes 15% in taxes of the 33k profit once you try to take the 33k out of the C Corp you are taxed again personally based on you personal taxable income level.
Are you starting to see your problem? Plus if you check out the tax laws C Corps pay a higher tax rate than individuals on a per dollar basis over $46,700. Plus the person is taxed again when they take the money out. = 2*
I hope you can see where I am going with this. C Corp equals double (2) taxes. I don't see the benefits you thought you were describing. You have confused an S Corp, LLC, LLP, Limited Partnership or General Partnership with a C corp. I do not believe that a C Corp relieves you of all liability. It helps, but just ask a doctor over the age of 55 what happened with liability and his old C corp.
Then whey you go to unravel the C corp. they are screwed with taxes due on accounts receivable and aging.
This question is for someone other than lethe.
Does Bill Bronchick state his reasons for using a C Corp with the flipping properties?
One reason for using a S or C Corp for flipping is so you don't have to pay self employment tax on some of the profits, whereas, an individual or LLC, pays self employment taxes on all the profits. SE tax 15.3%. This can save you alot of money on taxes if done correctly.
Look into the pros and cons of a S Corp vs C Corp. S Corp doesn't have double taxation, but C Corp offers more tax write off benefits.
Do a web search or consult a professional to find out which type of corporation fits your business the best.
Double taxation with a C corp is not a given. What many small business owners do with their C corp profits is bonus them out (to themselves) at the end of the company's fiscal year. You have to be a little bit careful to not have the payout considered a dividend because that would be taxed at the Corporate rate. This distinction is set in your articles of incorporation and by the type of business you have. I have had a engineering consulting C corp for three years and bonus the money out every year with no federal taxes due. There are some states (CA included) that make you pay a set state tax no matter what you have done with your assets/profits, but it's not too onerous($800/yr in CA).
As with much of the advise herein 1) it depends on your objectives and the type of deals you will be doing and 2) you should talk with your accountant and likely a Real Estate lawyer. Talk with the accountant first...the taxation implications are the most important issues.