Capital Gains On A Personal Home/rental Prop
Can somebody answer or even better point out the actual verbage that explains the tax consequences of:
If you decide to rent out your personal property how long does it take before you have forfieted your ability to sell it and take the tax free capital gains that the IRS gives you for a personal property that you have lived in for 2 years?
Further, lets say it is one year - if you move back into it after that does the clock start ticking all over again and you have to wait another 2 years before you are eligible for the tax free capital gains?
That was a great answer.
Most of what I have read says LLC for holding properties like rentals, S-Corp for build2sell and rehab2sell. That way some of your profits can be paid as dividends and save you some on taxes.
Can one person own both an LLC and an S-Corp?? What kind of tax breaks can I expect? Thanks!
Yes, you can own about as many different entities as you want.
With an LLC, all income is considered to be self-employment income. With an S Corp you can pay you self wages and take some profit as the owner of the company. The part you receive as owner is not subject to SE tax but the wages you pay yourself must be reasonable for the services you provide to the S corp.
Look into all the information that you can regarding 1031 tax free exchange. There are many limitations and rules, but it can prove to be a very beneficial tool to have knowledge of for the future. It will not work for this deal for several reasons.
Would the down payment on my first house be tax deductible? Or if I were to also purchase a rental property could this be deductible?
It sounds like your strategy in this investment is to flip (perhaps fix and flip) property for profit. With this strategy, your sale profits are taxed as ordinary income and you are not eligible to roll these profits into a 1031 tax deferred exchange.
Regardless of what you do with your profit, you still have a tax liability.
I realize I would still have a tax liability, but to reduce the tax liability would my last two suggestions work to reduce the amount I would owe in taxes?
Since you are selling them quickly, the houses are your inventory of goods that you buy and sell. The costs associated with the acquisition of inventory including money (down payment) for the purchase, rehab costs, interest on any loan used to acquire the property, insurance, taxes are all tax deductible in the sense that you will pay tax on the difference between your income (proceeds from selling houses) and your expenses. This will be taxed at ordinary income tax rates.
The above holds if you are doing this yourself. Since you have a partner, what you get depends on the form of business entity that you have with your partner.[ Edited by edmeyer on Date 05/13/2005 ]
Done all the time
Thanks for the info...much appreciated! Also, the lawer that helped form the LLC (LLC based in Oregon), is telling us we have to apply for a business license in Alabama (where the property is) to be able to rent it out there. True statement?
I answered a similar question in the law and legal forum, you might try not paying rent to your own LLC by either, in the quit claim deed reserving the right to live there for 10 months (and paying for it yourself) or delay the quit claim and use your LLC operating agreement to unequally distribute the losses/depreciciation for about a year (mostly to your partner) after the place is transfered to the LLC. My point is why pay tax on phantom income? (income from yourself) when there are other ways to make it fair for your partner.
Yes, when doing business in another state you will have to register with that state.