Transitioning From Rentals in TN to Flips in TX: LLC/S-corp Q's

[Leslie Beia]

Hi All! I lived in TN briefly and bought several properties there that I manage as STR's, and have a 3rd in MI. They are all currently in my TN-based LLC. I moved from TN to TX and have started flipping. My plan has been to transition out of STR's as I'm getting burnt out, and into flips at least for a while to build capital for longer term, passive investments. I am solidly on that path but need to get my business structures figured out to reduce my tax liability as much as possible. In 2024, my plan is to complete 2-3 flips in TX (already have 2 going!), 1031 my 2 TN properties into a BRRRR duplex in TX, keep my MI STR, and possibly start doing some flips in Detroit as well. Basically, I'm getting all the way out of TN, and doing all my business in TX and MI. Questions:

1. I assume it makes no sense to keep the TN-registered LLC after I sell the TN properties. Do I just start a new one or is there a way to transition to a new state? Does the 1031 process affect this at all??

2. I know I want to start an S-corp now that I'm involved in active RE. Do I need the new LLC 1st THEN the S-corp, or is the S-corp stand-alone?

3. Are there any considerations I should look at when deciding if I should base my LLC/S-corp in TX vs. MI?

4. My current flip is in my personal name- long story, the original plan was to hold it- but I'd like to get it under the umbrella of the S-corp when that's set up, is that possible?

5. Am I at a point where I should have an attorney or other professional oversee and set this all up, or is it still simple enough that I can do it myself online? I have a great CPA already. 

Thanks so much for any guidance!

[David Chung]

I don't have any thoughts on 1-4, but generally speaking for 5 I think an attorney is advisable for the initial setup, an estate/wealth planning attorney specifically.  The tax treatments in TX are likely favorable to you as investor, particularly because there's no state income tax, but there are likely other loopholes you can take advantage of with proper planning, so DIY on entity formation and tax structuring could be an expensive trial and error lesson.  An attorney would also be able to give expert advice on 1-4 as well.

[Martin M.]

@Leslie Beia

Great questions! You're obviously putting a lot of thought into this.

To answer your question 5, yes. Absolutely I'd speak with a business attorney.... as well as a CPA familiar with real estate investing. Sounds like you have a CPA.

For your question 2....

S-Corp is a tax election of an entity, e.g. an LLC can file as an S-Corp, a Corporation can file as an S -Corp.

The income from 'Active' flip investments is taxed higher than 'passive' rentals. This is where the S-Corp election of your entity that holds the flip property or properties can keep taxes more efficient.

There's a catch though..... maintaining an entity filling as an S-Corp has a lot more overhead to it than a basic 'disregarded' LLC. With the S-Corp there's quarterly payroll that you have to report, you pay yourself a reasonable salary and so on. CPA can expand on this.

The advice I'd been given in the past from a good CPA was, if you flip just 1 or maybe up to 2 properties a year, you may not need to go down the path of an S-Corp.

Once you get into more flips than that, S-Corp starts to look good. Google 'dealer status IRS' to get a good idea of how your income from flips can be taxed.

Regarding how many LLCs you need, as a general rule of thumb, it's pretty common to keep your flips and passive rentals in separate entities from each other for a few reasons. Some are tax related (discussed above) and others are limiting your liabilities. Flipping has more potential liability than rentals.

It's also common to have your properties contained in an LLC in the same state as the property.

This stuff gets tricky because you don't want to get carried away setting up a bunch of complex entities you don't need, yet you still need to keep things tax efficient and limit liability.

Google 'Holding LLC' as that's one approach often used for somewhat simplifying things when you're operating 'actively' in multiple states. For example you may have a Delaware Holding LLC that you own, and that LLC owns a flip LLC in TX, a flip LLC in MI and a flip LLC in TN. Only the Delaware Holding LLC files as an S-Corp. The benefit is you're not having to file multiple individuals S-Corps (for TX, MI and TN) it's just the one for the Holding LLC/S-Corp.

Again though, speak with your CPA and a business attorney. They'll best advise you.

Lastly... from a liability protection perspective... hands down a good insurance policy is more important than LLCs.

Hope this helps. Good luck!

[Michael Plaks]

@Leslie Beia

Your question should be posted in this forum instead:

https://www.biggerpockets.com/forums/51-tax-legal-issues-con...

[Shawn Parsh]

Leslie,

I would recommend that you get a qualified asset protection attorney on your team to go with your CPA. Setting up business structures can get expensive so you want to make sure you are making the right choices early. I live in NE TN where are your TN properties located?

[Leslie Beia]

Quote from @Shawn Parsh:

Leslie,

I would recommend that you get a qualified asset protection attorney on your team to go with your CPA. Setting up business structures can get expensive so you want to make sure you are making the right choices early. I live in NE TN where are your TN properties located?

Great suggestion, thank you! Both houses are in Clarksville and thankfully were not damaged during the tornado!

[Shawn Parsh]

Leslie,

Glad to hear your properties were not damaged. I spent some time in that area in 2002 when I was assigned to Fort Campbell.