This is a question that I'm probably overthinking (since I like planning I do that often), but...
Investors that are also Realtors - how do you get paid commissions when you sell or lease a property (including ones that you do not hold equitable interest)? Does it go under your investment company as income? Do you have an entirely new company for realty commissions? Or does it simply go to your personal account?
I have an LLC for my REI. I'm thinking that I should have all commissions go through the LLC. Tax wise it shouldn't make a difference, but at least the added income will help my financial statements.
Commission go under the Tax Id that holds the license. if a Corporation has a Real Estate license commission would follow that tax Id.
@Chris Bounds Do you have partners? If you do, and get a commission on the acquisition of a property, then it goes in the deal. Is that your question?
I have all real estate commissions from sales and leasing go into my LLC "The Sikes Real Estate Team". All investment is in a separate vehicle. I keep them separate to track P&L accurately. Also divides the liability.
Great Q. Commissions I run through my PLLC, and equitable interest sales (wholesale deals) go through personal. I don't take commissions on wholesale deals. Just too much risk of creating any unwanted agency issues.
If there is anything that will screw your day up, it's a agency claim that you misled them etc. In AZ, that is a "treble damage" day!!!!
Hope it helps!
Thanks everyone. I'll keep it at the personal level for now. Because the primary objective is REI and not to be a RE agent commissions will be mostly from flips. Of course, as time allows I'll represent retail clients too. I figure that I can use commissions made for living expenses and reinvest profits from the LLC.
@Ron Drake , No partners. If I do any partnerships a separate entity will be created.
@Karl Krentzel agreed on wholesale (contract assignment) deals.
All business income flows through business entities, if for no other reason than for asset protection (protecting my personal assets from business liability). Especially given that E&O typically won't cover you for a transaction where you a principal.
I agree with J. Scott, there is also an issue of expenses off setting applicable income, the allocation of expenses to income generated.
If you do a transaction inside an LLC, then receive a commission personally, that income needs to be set off by expenses as a Realtor. You're running two sets of books (legally) your auto expense for example off sets those trips allocated to commissions.
At the same time, you drove there as a member of the LLC. You can't take the same deduction twice, that deduction to income can't be counted by the company.
The question, IMAO, in my accounting opinion :), is to look to the greatest benefit of allocating expenses to income.
How does a commission impact the basis? In the LLC as the owner it would reduce the basis as an ancillary income allocated to that transaction, actually a reduction to costs.
I'm prone to look at the KISS method in accounting systems, all activities conducted with respect to a transaction is much easier allocated when related expenses can be assigned to the income and asset valuation of that transaction.
Questions arise too, as J. Scott mentioned E&O coverage, do you pay a premium on a per deal basis? Some do, then the allocation of premiums goes to the expense of the LLC.
In the end, the net earnings may be the same, the issue is the allocation of income and expenses, but there may be differences too. You could have expenses greater than your Realtor income, that would then be lost in that period, you can't assign the bulk purchase of Realtor signs to the LLC if you run your Realtor side separately. But, if your Realtor activities are all run through the LLC, then you don't have the issues of consolidating income or expenses, the expenses which are probably greater in the LLC will be off setting commission income.
You'll have additional liability protection, listing the LLC as the insured or co-insured for liability protection is simplified. Most likely, and probably already required, would be registering the LLC as a licensee under management of your personal license. This may keep insurance claims competing for which policy may apply to an insured loss.
Acting as a Realtor, your broker (if you have an agency relationship) will be on the hook, suits will trickle through the broker to your LLC, not you personally acting as a Realtor.
You can also receive commissions as earnings from the LLC, after expenses, check any differences as to withholdings and estimated taxes due, there could be. You can be on a salary. Then consider the LLC in a corporate tax option.
Bottom line, I'd consider a more simplified accounting system, additional opportunities of expenses off setting income, added liability, ease of managing insurance coverage, allocating taxable income, and, not mentioned, branding your company.
Are you running around doing business as Joe Realtor or as XYZ Company? Branding your business, advertising and your overall mission may be much better as doing business as XYZ Company!
There's my nickel's worth. :)
Thanks @Bill G. and @J Scott . I'll check with my CPA to make sure I get it accounted correctly. I'd prefer it all to go through my LLC.
PS @J Scott - Love the Book on Flipping Houses!
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