Best Entity for Flipping and Best for Rentals?

Question

Hi, I’m new to this website, but heard I can ask all of my questions here. I was wondering what you guys think the best company structure may be in terms of entities in terms of both flipping houses and also holding rentals and eventually using 1031. I feel like they all have solid advantages and disadvantages, but I’ve been leaning towards a Corp and don’t know if I should just register a C Corp/change my current LLC or just register my LLC as an S Corp.

Angad Singh · Answer

I am also new to real estate investing, and would also love to understand what business entity should I create to start investing in real estate one that reduces legal liability and also helps save taxes.

Alecia Loveless · Answer

@Carson Wright Hi Carson, while others may disagree with me I’d personally say that while you’re starting out unless you’ve got a bunch of assets elsewhere you’re really fine going with just using your own name at least for rentals at first and having enough insurance coverage in the form of your regular homeowners and an umbrella policy for probably $1,000,000.

Unless your state requires a business structure.

At least while using LLC you may be limited as to the types of loans you can get. Banks won’t do conventional Fannie Mae and Freddie 30 year mortgages with an LLC.

I don’t have enough experience with Corporations to know if the same holds true for them and business loans or if you would have to build up business credit first. Someone else, either a lender on the forum or a brick and mortar bank you contact can answer that.

I am not sure if there could be tax benefits to holding flips in a corporation but ultimately they’re taxed differently because the profit is turned over so quickly.

Personally I think the headache of having a board and having to have annual meetings might be enough to turn me off of the corporation but then again if done correctly and documented properly and you had enough money to do so you and your spouse could hold the annual meeting in the Bahamas and it would be a write off I believe.

Obviously consult an accountant.

Bhekizwe M. · Answer

Hello

Getting starting and being active is most important

Basit Siddiqi · Answer

@Carson WrightLLC's are likely the most versatile entity structure if we are just talking about US Citizens / Partnerships / Corporations as members.You may have to think of other structures when you are considering taking on foreign individuals / exempt organizations.When it comes to ordinary income, speak to an accountant to see if an LLC taxed as an S-corporation makes sense.Best of luck

Inessa Stysis · Answer

First, yes you can generally take deductions on a personal return for real estate businesses. These would appear on a Schedule C (if it's a flip) or a Schedule E (if it's a rental). You cannot however take deductions for labor you do on your properties, unless you are also paying yourself income and reporting that (in the world of accounting, if there's a deduction there must be income somewhere else). You can deduct the cost of materials. You can also deduct mileage, but you are supposed to keep contemporaneous logs; if you're audited you must be able to provide these.

These rules would be true for a business as well. Creating a business for real estate is more important on the liability than the tax side.

Carson Wright · Answer

Thank you all so much for such great advice! I’ll have to look a little more, but the info in this thread is golden!

Michael Plante · Answer

Here is a video on best entity for flipping

Angad Singh · Answer

@Alecia Loveless, @Olu Lijadu, @Inessa Stysis thanks for sharing your thoughts on the subject. I had a follow up question for you guys.

If I buy the properties under my name, will I be able to claim deductibles/expenses, depreciation the same way as a businesses do ? For example, if I do repairs on the house, or traveling to meet the tenants etc can I expensive all of this against expenses as a business. I know that businesses can claim all sorts of expenses to reduce their tax liability.

I have a job from which I am saving money to invest in real estate. As an salaried employee there are only very few deductions that I qualify for on my income. I am worried that the same might be applicable if I invest as an individual rather than business. I don't want to limit my options to claim deductions on various expenses as a real estate investor. I know that

Inessa Stysis · Answer

@Carson Wright speaking from an accounting / tax perspective it’s generally not advisable to have property in an s Corp. Theres a number of reasons why that can get pretty technical including basis, distributions, and allocations to shareholders (if you have partners). Also you’d have to set up and pay payroll taxes from the company on your earnings or risk under reporting your taxes on your personal return.

Olu Lijadu · Answer

@Carson Wright

Hi Carson I agree with Alecia, start of with your first few properties in your name, eventually after you pile up a descent amount of properties you then can branch out into LLC’s in my humble opinion. Good luck

Best Entity for Flipping and Best for Rentals?

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