Are there any tax benefits to doing fix n flips where you sell the LLC that the property is held in vs. selling the actual real estate?
Example: Purchase and rehab a house in an LLC, then sell the LLC.
Example: Purchase and rehab a house in an LLC, then sell the real estate.
Let's say I flip 10 houses in a year, is there a tax benefit if I sell the LLC's or the real estate?
Thanks for your input,
@Aaron Westerburg see your tax advisor for tax advice specific to your situation, but from an investor perspective, a retail buyer (the ones who pay the full FMV for properties and thereby offer the highest return) will not buy an LLC.
I've heard mention of this tactic to avoid deed transfer restrictions, but that's more of a wholesaling question, not a tax issue.
If you sell an asset in less than a year from the time you buy it, you owe income tax, no difference if it's the LLC or the real estate as far as I know.
I'll summon @Steven Hamilton II for his opinion on the idea?
Thank you @Robert Leonard for your response. I am intending on selling to investors, rather than owner occupied buyers.
Most investors won't want your LLC, since they can't be sure what potential liabilities might be out there.
@Wayne Brooks what potential liabilities are you referring to?
Perhaps an a endless number of possibilities; credit lines, debts of the LLC, potential lawsuits of injured people, law suits for any kind of tort, unsecured loans, etc.
@Robert Leonard If you sell an asset in less than a year from the time you buy it, you owe income tax, no difference if it's the LLC or the real estate as far as I know.
I agree; even with my "tax exempt" self directed IRA,LLC if I dont hold the property for one (1) year I can be hit with a tax. I might get away with doing it once but in sure to be red flaged if I kept doing it.
Im not sure about selling the LLC along with the property. I would think even if you technically could sell them together with no tax liability you may eventually end up in hot water. Opening 10-30+ LLC's a year to flip houses just to avoid tax obligations may draw unwanted attention from our friendly IRS. You do open the LLC in your name as Manager through the IRS and they give you the EIN tax number correct?
@Duane Angell thanks for the response. I'm not trying to avoid paying taxes all together, or draw any unnecessary attention from the IRS. What I'm wondering, is if one has lower tax implications than the other. Thx
Most LLC sale transactions (if not all) will be structured as taxable asset. When selling business assets, the federal tax rate on gains can vary from 20% - raised from 15% (long-term capital gain) to 35% (ordinary income rates), and there is an additional 3.8% Medicare tax applicable to certain passive investors. The tax-free exchange rules generally do not apply to LLCs. Converting an LLC to a corporation immediately prior to a tax-free reorganization also might be challenged by the IRS.
Now what state will the LLC's be structured and/or sold? Depending on the state they may want their slice of the pie also.
I think with the tax liabilities and the potential LLC liabilities this would be a hard sell.
You could structure the LLC's thru a 401K or IRA for some tax shelter but then you're still limited to holding for one (1) year.
If someone else knows how we can save a penny on tax I would like to know, it’s possible my thinking is flawed ??
No tax benefit comes to mind, PA will still hit you on transfer taxes according to Steve B.
Advantages would come from passing ownership without public notice or knowledge as the Operating Agreement and the books of the LLC are internal documents and arrangements.
Another is when there are deed restrictions that cause some restriction to passing title, since title doesn't change. If a property doesn't meet code or has some issue that is required to be cured before title may be passed the transaction can be accomplished by selling the company in most cases. Local customs may apply.
There could be tax benefits with a Sub-S as stock transfers will be different based on the basis and appreciation of stock over time.
Steven Hamilton may chime in. :)
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