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BlogArrowFlipping HousesArrowFlippers and Airbnb Investors: Here’s How an S Corp Election Can Help You
Flipping Houses Feb 18, 2021

Flippers and Airbnb Investors: Here’s How an S Corp Election Can Help You

Scott Smith
Expertise: Landlording & Rental Properties, Business Management, Personal Finance, Real Estate News & Commentary, Real Estate Investing Basics
102 Articles Written
s corp-taxation

Typically, real estate investing is a passive activity. Profits are subject to income tax—not self employment tax. An active trade or business, on the other hand, is likely subject to the full 15.3% self-employment (SE) tax. Since a flipping or wholesaling business is considered an active business, house flippers may be subject to the full 15.3% self-employment tax, which can lead up to a $21,068 hit to your earnings. Same can be true for many Airbnb rentals.

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Not every flipper or Airbnb landlord will benefit from an S Corp election taxation. However, enough do that you should consider it as an option. Let’s take a closer look.

Why the IRS may see flipping as active income

Some real estate investors aren’t really investors (at least according to tax laws). They are property developers who renovate and rehab. In other words, they’re flippers. Profits from real estate flipping may be subject to both income tax and self-employment taxes. Flipping is an active business. That translates to ordinary income taxes at your marginal rate as well as self-employment tax and/or payroll taxes. This depends on how the deal is structured. Compare flipping to buy and hold investing, where investors are relying on passive income.

Just as with any other active trade or business, an S Corp election may be a good way to save self-employment (SE) taxes. There are a few things flippers should know about organizing and defending their real estate portfolios. Chief among these is how to construct an asset protection strategy that adequately defends against lawsuits:

  • How frequently do you plan to make transactions? Many flippers will have a property bought and sold inside of a year, for example. Certain entities are better for frequent transactions.
  • Licensing and other operations issues. A savvy house flipper may want to get a real estate license (or work with a team member who has one), even if doing so isn’t legally necessary. What’s best for you in terms of daily operations may come down to personal preference.
  • What percentage of business is your flipping activity? If you are exclusively a flipper, you will almost certainly require a different approach than an investor with only minor flipping activity—or who doesn’t rely on flipping transactions for profit.

It’s vital that those engaged in active real estate flipping find a way to limit inherent liabilities. For many flippers, the LLC with S Corp election helps square both the issue of liability and how to formalize the flipping business.

Related: LLC vs. S Corporation: Which Is Better for Real Estate?

Airbnb rentals: substantial services can trigger SE taxes

If you are renting part of your home as an Airbnb for 14 days or less, you do not have to report or pay taxes on that income at all. Nice, right? Of course, you cannot deduct related expenses either. If you have Airbnb properties, you may have an active trade on your hands (rather than a passive real estate investing business).

Normally, income reported on Schedule C is subject to the SE tax, but that’s not always the case for rental properties. When your average stay is less than seven days, it is considered a business and not a rental activity, and is reported on Schedule C.

Schedule C is the tax form filed by most sole proprietors. As you can tell from its title, “Profit or Loss From Business,” it is used to report both income and losses. Many times, Schedule C filers are self-employed taxpayers who are just getting their businesses started.

If you are renting out a property using Airbnb or a similar service, and want to completely avoid the SE tax, then it is important not to provide substantial services to your guests. As long as you are simply renting out your Airbnb and providing no additional services, you will avoid the 15.3% self-employment tax, even if it is reported on Schedule C.

What are substantial services?

For a rental property to be subject to the self-employment tax, you would provide substantial services such as:

  • Changing linens
  • Providing fresh towels
  • Cleaning the rooms during a guest’s stay
  • Providing hotel-like conveniences such as a coffee maker and coffee
  • Providing vehicles, bikes, or excursion options

This is because you are now providing a more hotel-like service, which is considered a business and subject to the self-employment tax.

Related: Airbnb Real Estate Investing: 6 Pros and Cons

What to do if you provide these services

Make sure you are properly tracking and deducting all your rental expenses, including depreciation. As we know, this “phantom expense” can cause a property to show a loss for tax purposes—or at the very least significantly reduce the net income. Next you should put your Airbnb properties in an S Corp, or an LLC taxed as an S Corp. This can split your income between W-2 wages, which are subject to the self-employment tax, and distributions, which are not.

Keep in mind that if you’re already earning $137,700 or more before your Airbnb income, you will only pay the 2.9% Medicare portion of the tax (1.45% for the employer and 1.45% for the employee, or 2.9% total) because the Social Security portion of the tax is capped on $137,700 of income.

Would you consider using an S Corp for your flipping or Airbnb business–why or why not?

Share with a comment below! 

By Scott Smith
Scott Royal Smith is an asset protection attorney and long-time real estate investor. His law firm, Royal Legal Solutions, helps thousands of real estate investors and entrepreneurs in all 50 states protect more than $1.2 billion in assets. Since 2014, he has published over 1,000 posts and articles on BiggerPockets and has appeared on hundreds of podcasts.
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15 Replies
    Matthew Murray
    Replied 10 days ago
    Could you explain why depreciation would affect income? Pertaining to where it was mentioned in the second to last paragraph. Thanks!
    Ryan Wittig Real Estate Investor from Boston, MA
    Replied 5 days ago
    The depreciation would offset income.

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    Joddie Mcclain Real Estate Agent from Orange Park, FL
    Replied 10 days ago
    Good morning, Great article. I am currently a teacher, real estate agent in Florida, and I do some light flipping and rent out my homes. My LLC has been a disregarded entity for the past five years, but recently I changed it to a corporation. I’ve been getting mixed advice about it all and have thought about going back to disregarded entity. Any thoughts on this ?
    Marquitia Booker Rental Property Investor from Fort Mill, SC
    Replied 9 days ago
    IMO the biggest benefit to switching to an LLC-C Corp would be so you (as the owner) could take a salary and get a W2 as an employee vs a 1099 for self-employed. Its especially helpful when going to apply for business loans!

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    Celena Strong
    Replied 9 days ago
    What do you mean by disregarded entity? I also have an LLC. Are your rentals under our LLC?

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    Steven Shulman
    Replied 9 days ago
    A disregarded entity does not file a separate tax return. It is filed under the owners Social Security number

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    John Woodrich Flipper/Rehabber from Minneapolis, MN
    Replied 9 days ago
    If you flip a house you will be subject to ordinary income and SE tax - it is not a question. Some people may define a flip differently - to me it is purchase, rehab, and sale. Doesn't matter if you own it for a month or two years, if you simply rehab a property for sale it is a flip. There are ways around it if you can prove intent but no need to beat around the question here. Something not considered in this article is the cost of setting up an S-Corp, cost of filing an S-Corp tax return, cost of payroll tax filings and other considerations. This article doesn't provide enough to act on, anyone considering this should talk to a tax professional. Airbnb is rarely subject to SE tax so an S-Corp is not used very often... There are some reasons to do this but for the everyday investor owning a couple properties it generally makes no sense. Every few years I get a doctor who wants to treat their Airbnb properties like a hotel to move them to schedule C to deduct losses but that generally isn't correct.
    Ryan Wittig Real Estate Investor from Boston, MA
    Replied 5 days ago
    Thank you as well John. This article raised a lot of questions for me as I am a developer and have AirBnB units.

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    Ezichi Oha Wholesaler from North Hollywood, California
    Replied 9 days ago
    Thank you for your comment. It provided some clarifications to me

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    Dax Rhorer Investor from Los Angeles, California
    Replied 9 days ago
    Hi, My business is an LLC taxed as a S-Corp. For the past few years we have only had rentals. In 2020 we started flipping houses, 14 total. I’m reading that the flip houses, in volume, are considered inventory/goods sold and taxed at ordinary income. If this is the case, I wouldn’t report them individually. What about the1099-s forms I receive from the title co? Doesn’t that raise a red flag or no?
    John Woodrich Flipper/Rehabber from Minneapolis, MN
    Replied 9 days ago
    Correct in that they are inventory and you report total sales on one line. No issues with the 1099-s forms unless they are reported in your personal name, then you to report them on your individual return and nominee to the corp. Cleaner overall if you title things correctly.

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    John Murray from Portland, Oregon
    Replied 9 days ago
    Real estate investor, no self employment tax or FICA. Passive income no self employment tax or FICA. No LLC but an umbrella insurance policy sole proprietorship. House flipping in my state is complex and highly regulated as well as taxed. It requires a developers license, not the best way to invest. A real estate professional is for those that want to pay more tax than an investor. BRRRR, sell when you can this is the best way to invest.

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    Sharon Buckley Investor from Fairfield, California
    Replied 9 days ago
    I am a California resident and retired teacher who currently has a couple of rentals which are owned "free and clear" in this State. These homes are "disregarded entities" and I would like to form either an LLC or a C or S Corp for them but am still confused as to which one I should use. Could you explain the differences and help me decide which would benefit me the most? Also, do I have to have a separate LLC for each property? Thank you.

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    Harry Looknanan Jr. Rental Property Investor from San Antonio TX
    Replied 9 days ago
    I don't believe W-2 earnings are subject to Self Employment taxes.
    Sergey Tkachev Investor, Agent, CPA from West Sacramento, CA
    Replied 9 days ago
    Self employment taxes are essentially FICA (social security and medicare) taxes W-2 earnings are subject to the same taxes, they are just called payroll taxes and structured differently but the tax rate is the same

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