How To Hold A Rehab Property
Legal question for rehabbers...
I have a property i've tied up under contract and it's such a great deal that I'm considering doing my first rehab with it.
I currently have an S-corp for wholesaling. My question is can I hold this rehab in my S-corp since it will just be for the period of the rehab 3-6 months, and then I will sell. Are there any liablitity or taxation issues that I should know about?
Or if I tie it up in my s-corp can I transfer it to an LLC (which I haven't yet created)
Thanks rehabbers.
I don't understand why you want a seperate S corp and LLC. That just gives you more work when it comes to tax time.
If the purpose of your S corp is REI, then put all of your properties under it.
You're right it will. But what I'd like to know is since I already have my S-corp, are their any differences in tax issues or legal issues vs. an LLC for doing rehabs.
I just would like to know if there are any problems associated with holding a rehab property in an S-corp, which I have already formed. <IMG SRC="images/forum/smilies/icon_smile.gif"> [ Edited by ddhamilt on Date 10/28/2003 ]
There are a few points to consider. Rehabbing is considered an active trade or business by the IRS. Under a single member LLC this would be subject to self employment tax (15.3%) in addition to your regular income tax rates.
Under an s-corp you do not have self employment tax so from a tax advantage this is favorable.
The only liability of an s-corp comes into what is called a charging order. This only applies to some states (Iowa, Nevada, etc). A charging order only applies to LLC's. If you have any type of a judgement against you the only remedy to collect that is to obtain a charging order and receive distributions of the profits from the LLC. You can file a form to the IRS to keep the earnings in the LLC but you still pay tax. This means that the judgement holder that obtained the charging order must pay taxes on money it doesn't collect! This give you the opportunity to buy out the judgement at deep discount. This does not apply to a mortgage or lien attached to the property itself (ie you can't avoid forclosure).
Under an s-corp you can get sued and your shares of stock in the corporation can be given to someone as judgement since they are an asset to you. The new shareholders can then vote you out and then sell the property or what not or do as they please.
An s-corp for flipping is not necessarily bad because your holding time is short. You likely will only have yourself and contractors on the property. Make sure you obtain proper insurance.
15.3% is a huge cost so I still recomend and use an s-corp for flipping/rehabbing.
Hope this helps! GOOD LUCK[ Edited by myfrogger on Date 10/28/2003 ]