Before unloading my barrel of questions, let me get you all up to speed with what we've done so far...
My story begins many moons ago, but I'll skip ahead to the key points. My husband and I bought an ugly townhouse at the edge of a seedy part of Longmont, Colorado in 2013, just after I quit my "big girl" job to finish my degree in Construction Management at CSU. After graduating last May and countless all-nighters spent renovating the property, it was time to list it!
Our neighbors thought we were crazy when they saw our asking price, but because it wasn't just another bland, beige flip, we got exactly what we asked for, nearly double the original sale price. Wanting to capitalize on our profits, we bought a vintage Airstream to live in while we searched for the "right deal" in the midst of the insanity of Colorado's front range real estate market. After two months of searching we finally found our deal!
In September, we bought a house in Lakewood with a decent sized lot for the Airstream and a coach house above the garage! With my husband working as a property manager and my particular set of skills, we had always envisioned ourselves owning rental properties, but figured we would have to do several flips before we would have the capital to do so. Now, after one deal, we have a rental apartment and also plan on renting out our vintage airstream once it's been fully restored.
The only dilemma is we didn't plan for this to happen so quickly. While this is a good problem to have, we now need to backpedal and formalize our business. We have a tenant moving into the coach house in 6 weeks and renovations are well under way, so I'm somewhat scrambling to get things in order.
My vision for our business is to have several entities all working together. Either myself or my husband will eventually get our real estate license to buy and sell properties. We would have an entity responsible for acquiring distressed properties and selling them once they have been renovated, another entity responsible for overseeing and performing the renovations, and another to manage the properties we are holding on to. I can also see us eventually managing renovations and properties for others, once we've established a strong reputation. This myriad of services would allow us to use our various talents to be flexible in such a risky, fluctuating market.
Now, to my questions for all of you much more prepared investors out there...
Obviously we are a long ways from our end goal, but seeing how quickly we jumped to the next step already, I want to make decisions with our end goal in mind. That being said, I plan to form an S Corp now, but I'm not sure if I should form it for our renovation entity, our property management entity or both, since we will have expenses for both this year. Or should we just form a blanket corporation (or group) to encompass all of these aspects until we've grown large enough to split into the various entities?
Also, how can I claim expenses prior to the time the corporation was formed? If there is no way, should I wait to form the corporation at the beginning of next year and just claim the expenses on my personal taxes?
We were planning on renting the Airstream as a vacation rental, but I read vacation rentals can be taxed at a much higher rate. Should we look into doing short term leases instead? Additionally, since we've had some expenses for the trailer this year, can we claim those expenses if we don't get the restoration finished in time to rent it out this year or do we need to try and get it finished to rent it out for at least a night or two this year? Are there any other pitfalls we should worry about specifically pertaining to renting out a travel trailer on our property?
I have a million other questions, but mainly, I'm trying to figure out the basic framework of where I should put my car, now that I already have my horse! Any and all advice/feedback is both welcome and appreciated!
That novel is just the key points?! haha, kidding. Great work getting started.
I would do an LLC for the management and an LLC for the flipping. You can still deduct your expenses prior to forming entities. Until the entities form, you act as a sole proprietor... taxation is the same as if it were a standard LLC. Just make sure you have your receipts and they are business expenses and then write them off.
I don't know about expenses for your AirStream, maybe @Linda Weygant can jump in and help out. She's a stellar CPA, and lives close to you.
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I prefer to call it a novelette. ;) I figured it would help eliminate the "it depends" answers. Thank you for your input! That was great advice and I'll definitely try and get in touch with Linda. And I would love to come to the meet-up. I was actually thinking of coming to the next one, so now I at least have someone to look for! :)
I ran my Property Management Co. as an S corp, and I was treated as a employee of the company and got a salary (my CPA recommended this entity, it minimized my taxes). As a shareholder of the company I also got disbursements which are taxed at a lower rate than my salary...
My understanding is that doing flips and new construction it is best to be under an LLC (and I believe that you can be an LLC and elect to be taxed as an S Corp).
Sounds like its time for you to add a CPA to your team. Better to it in the beginning!
Thank you for your input Josiah. I actually have been already asking some friends for a recommendation for a CPA knowing it was about to get complicated. I'll definitely ask them about which is better for flips, etc. So, that is a good question to put on my list!
@Rachel Dunham so I started out with the same vision and still have not done anything about it after 15 years. My experience is that the LLCs and S Corps pass through to our personal tax returns so no real tax advantages one way or the other. What I have done, is an S corp for my real estate brokerage. I have both the sales and property management under that entity. I have a friend that does a good bit of flipping and he uses and LLC for that. You should listen to the podcast 196 with @Brandon Hall as he speaks to LLCs and taxes.
Funny you should mention that episode, Bill. I did listen to that episode and have an appointment to talk to Brandon in a couple of weeks! I also learned a bit about the various business entities in a business law class I took a few years ago, but just enough to be dangerous! :) From what I remember, with an LLC, they can still come after your personal property, should you ever find yourself in a law suit. I can still remember my prof saying that the main reason people do an LLC instead of an S Corp, even though there isn't as much protection or benefits, is because it's so much easier to set up. Though, it's always good to get as many opinions as possible on subjects such as these, so thank you so much for your input!!
Also, I want to encourage you to take the steps to make your vision come to fruition!! My dad and I dreamed of flipping houses together when I was in high school, long before HGTV got ahold of the industry. Had we acted on it then, I can only imagine how well we would have done. My dad will most likely be retiring in a couple of years and my hope is he will join me in one way or another. It may not look exactly how we envisioned back then, but instead of regretting the steps we didn't take, I'm moving forward and using the experience I've gained from my deviations to hopefully make it even better than we dreamed!
@Rachel Dunham congrats on your successes and future successes! I'm just starting out as an investor and haven't made any moves quite yet BUT I am almost finished reading "Tax Strategies for the Savvy Real Estate Investor" and I HIGHLY recommend you and your husband read this book or another one like it.
I also recommend finding and speaking with a tax attorney that specializes and works with Real Estate Investors. Maybe you all already know all of this but I figured I would chime in. Finding the right tax attorney could save you thousands of dollars. They will also guide you in the correct direction on what kind of company is best for you. Starting out you may not need to open up so many. Each will incur fees associated so it may make sense to wait until you're up and running to set all of them up.
I'm no tax attorney, though, so again I recommend finding a great one and never looking back!
Good luck :-)
@Rachel Dunham , congratulations on everything you have accomplished so far! Both LLCs and S-Corps will give you some measure of protection from personal liability (i.e., they can't go after your personal assets) and overall legitimacy (and they are pretty much the same on the liability protection). I prefer (and most of my investor clients prefer) the LLC because of its flexibility. S-Corps are generally more expensive to maintain, they have more rigid management structures, and they have less flexibility when dividing profits and losses. Of course, there are tax implications of either structure, so you should talk to your tax professional about which works best for your situation.
As I say quite a bit, hire a PRO to help. CPA, Attorney, etc.
I have an S-Corp that buys my flips and receives my real estate commissions.
@Rachel Dunham I highly recommend you listen to podcast 109 which discuss setting up various LLCs and trusts for holding investment properties as well as how to structure them for asset protection.
Also, be sure to download the "Top 10 Ways To Protect Your Assets.docx" which is in the show notes here: biggerpockets.com/show109.
Hope that helps.
Clint Coons explains LLCs very well on youtube. He even runs a business setting up LLCs for real estate investors. Maybe check out a few of his videos. He makes it very easy to understand this confusing topic.
Check out All Up In Yo Business, Aiden H. Kramer on YouTube. There is a lot of information on Bigger Pockets, but she breaks it down all the way down with a lot of information. Just something to check, if you want...
Huge thanks to each of you for your input! Sorry for my late responses, we went on a wild trip out to Chicago to watch my Cubbies in Wrigleyville. Thank baby Jesus they made the trip worth it on the last day!
I listened to the podcast 109 this morning and WOW!! I may have to listen to it 3 more times!! That was an incredible amount of information and I'm so grateful to have heard it in the beginning. So, huge thanks for that suggestion! I will have to listen to those YouTube videos next! These are the moments when I wish I could just spend all of my time devoted to learning about and doing real estate, but maybe some day!
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