BiggerPockets

For buy and hold, I'd agree. People starting out can get as much or better protection with insurance.

For flipping? No flipping way!

Your risk exposure as a flipper is similar to that of a builder and as such you need to operate through an entity to limit your exposure.

Corey,
I prefer (in my personal situation) to use LLCs for both flips and holds, however, to answer your question, many states how specific laws and requirements regarding flips and therefore, you should consult an attorney in your state. Since you are from TX and I invest heavily there, I know that TX passed a law that states that you must use licensed contractors and subs and must provide applicable warranties. Check with your attorney on the exact law and rules to follow or you could expose yourself to liabilities. Having an LLC is just one more layer of protection for you, as is, Land trusts, and operating your business in a responsible way.

The IRS is really cracking down on Sub-S corps that do not pay the owners a reasonable salary if the owner is active in the company.

You will still have employment taxes to pay. In addition, you may have unemployment and workman's comp depending on your state.

I would never hold any title naked (in my own name) other than a personal residence.

I would set up a LLC and expense as much as possible to lower you personal taxes

Hi Corey,

I agree with many of the posts...use the protection of a business entity that is provided by your state. That being said, what kind of entity?

There are all kinds of opinions on that subject. I advise my clients that their goal should be to determine what type of entity will give them the most protection without complicating their life?

Oftentimes this will end up being an LLC.

Now from the tax angle think of an LLC as a lump of clay that you can mold into the type of tax planning that fits your individual situation.

You can choose to have an LLC taxed in one of four ways;

1. A pass through entity ( to your tax return)
2. As a corporation with tiered tax rates like a c-corp
3. As a partnership if more than one person is involved
4. With an S election that allows you to claim some income as salary and the balance as distributions, on which you pay no Self Employment tax saving 15.3%

If your tax adviser is not knowledgeable with these choices find one who is. After all it will help you to keep thousands extra dollars in your pocket where they belong!

Dave

Originally posted by Richard Warren

If you are flipping properties you have a good chance of being liable for self-employment taxes. For this reason an S-Corp could actually be the preferred entity. Personally, I would NEVER consider a Sole Proprietorship for ANY investment, flip or rental. I'm surprised that your CPA made such a recommendation, the vast majority of them would never do so.

I or my CPA has never heard of the IRS going after anyone for flipping properties as self emplyment income. I do not believe this statement to be true. In addition, as long as the investor has adequate insurance for liability protection, why would it surprise anyone that a CPA would suggest holding a property personally? There is nothing wrong with that strategy, as long as the investor "minds his/her business"

Having an S-corp for flips does not make sense either, unless I am missing something (if so, please point it out). In an S corp, you would be required to pay yourself a reasonable salary and thus have self-employemnt tax, therefore, LLC's make the most sense if you are choosing to use an entity.

Originally posted by Will Barnard

Having an S-corp for flips does not make sense either, unless I am missing something (if so, please point it out). In an S corp, you would be required to pay yourself a reasonable salary and thus have self-employemnt tax, therefore, LLC's make the most sense if you are choosing to use an entity.

An LLC does not exempt you from self employment tax.

How would you flip a property without being classified as a dealer?
You either are an investor or a dealer...there are only 2 options that I know of...

To be an investor, you need to own something with the intention of holding it as an investment.

What matters is the primary characteristic of your business. If you primarily flip and occasionally hold, sooner or later, you will get tagged.