VESTING IN LLC... WHAT TO DO?

Question

Just won my auction and contracts are out.  This is going to be a flip investment and I will be vesting title in my llc.  I have never put property in LLC name is anything special required at closing to show I am the authorized agent of said LLC?

Also I am anticipating no issues using a 1031 after the sale to move on to the next flip.  Any differences using a 1031 entity vs individual?

ThanksDan

Linda Weygant · Answer

I think the fact that you're asking the questions you're asking indicates that you need a CPA and you've graduated and "moved past" turbo tax.  Don't get me wrong... Turbo Tax is a great product for people with either very simple tax returns or who absolutely know what they're doing.

Because you're asking questions that will very quickly get you in trouble (like trying to add your sweat equity to the basis), I suggest that you either retain a CPA or start reading all of the information on the IRS website about rentals, basis, conducting business, inventory capitalization, etc.  Your questions are far from basic and require an in-depth analysis of your personal situation.

Whether you should use an LLC, an S-Corp or anything else is something that you should discuss with somebody who has a full understanding of your tax and income situation, your future goals and an understanding of your current net personal worth and where you expect to be in the future.  Doing it because "I already have one created and it adds a layer of protection" is very much a shoot first, ask questions later type of scenario.

There are many talented individuals both on Bigger Pockets and probably in your neighborhood who you can retain for guidance on these very complex issues.

Ned Carey · Answer

A flip is taxed as ordinary (Active as you call it) income. Technically it may be a short term capital gain but the effect is the same.

LTV for investment properties is typically 75%. of purchase price. after operating for 6 months to a year then you can base the LTV on the appraised value. (Hopefully more than your purchase price.

Of course terms will vary considerably by market and particular lender.

Ned Carey · Answer

@Dan Liptak

A CPA can help with taxes and the tax benefits/costs of an LLC but an attorney will address liability and legal issues. Sometimes they will offer contrary advice. But I caution everyone not to get legal advice from your CPA or tax/accounting advice from your attorney.

Your basis for the property is  basically all your costs of acquisition and capital expenses prior to renting it out.

No, you cannot expense you own labor. You could pay yourself, depending on your legal structure, but they you are simply moving income from one return to another.

See @Steve Vaughan's  reply about SDIRA. There are lots of rules and they aren't as good for real estate as one might think on first blush. Because of the explosion of real estate deals done in IRAs, the IRS is looking at these deal much more closely. You really don't want to make a minor mistake and have your entire IRA disallowed 5-10 years from  now.

PS thanks for the votes

Jay Goldblatt · Answer

Hi Dan,

Would like to help you with the SD Roth IRA you would like to set up.

Bottom line: The rental property scenario is going to be the best bet to save on potential taxes.  The flipping constitutes a business which profits would be taxable ( ironically in a Roth IRA, I know!)  Not to say you couldn't hold onto properties for 12 mos and then sell them - that would not be considered a business.  Or loaning the Roth IRA $ to a third party to do the flip would also not be considered a business.

The tax we are talking about and trying to avoid is called Unrelated Business Income Tax. or UBIT.  Here is a partial review:

"One common UBIT question that arises is that of flipping properties. Although real estate is normally considered a passive investment, if an investor engages in active property flipping, that could be subject to UBIT. So how would you know if your property transactions are considered active or passive?

The generally accepted distinction is that properties that are sold after being held for a year or longer are not considered “flipped". Those held for less than a year and then sold would be considered “flipped". Another factor to take into consideration is the amount of your property investing that involves flipping. If the majority of your properties are held for the requisite length of time, then an occasional flip will not nullify their passive investment status. In all cases, you should ask a financial professional as to the details of your specific case."

Looking forward,

Jay

Dan Liptak · Answer

Thanks for the info @Ned Carey you got my votes!  @Nick Versetto I do not have a CPA... nothing against them or people who use them.  I just use quicken, quickbooks, and turbo tax.  I feel like with a little planning and research ordinary people can take care of their own stuff.  Maybe the day will come when my opinion changes or hopefully  its just no longer feasible for me to handle my own accounting.

They didn't advise me to use an LLC I just did it because I already have one created for business and it just helps add a layer of protection should anything go wrong in the future.

@Steve Vaughan Thanks for letting me know about the vote as show of appreciation for valuable information after all that is why I am here.

Steve Vaughan · Answer

In general, I would conduct highly taxable activities like flipping and lending in an SDIRA. Problem is, you can't work on them yourself. Self-dealing rules or something.

I would hold rentals (with tons of tax advantages) outside of retirement.

I would check with  and pay my tax adviser as to the details of cost basis and such.  @Ned Careyis a seasoned, helpful & knowledgeable investor on here, and I don't mean to speak for him, but it is not fair of you to continue asking highly specific tax stuff (without even voting for his helpful posts, mind you) of someone who doesn't claim to be a tax person.

It's completely different if a tax pro on here offers to help educate you for free.  Just my opinion @Dan Liptak.  I've been stuck with this line of questioning many times and felt the need to express how unfair it can be to us.  Cheers!

Ned Carey · Answer

Generally the title company will want a copy of your operating agreement showing that you have the right to sell and sign for transactions. Sometimes we provide a company resolution for same, either with or in addition to, the LLC operating agreement.

You cannot use a 1031 for a flip. 1031 exchanges are for Investment (rental) properties. Wholesale flips and rehabs do not qualify. You also need to hold the property for a year.

I am by  no means an expert here but I bet someone here who is will chime in.

Dmitriy Fomichenko · Answer

@Dan Liptak

flipping is considered an active business and all the income from an active business in a retirement account (or any other tax-exempt vehicle) is subject to Unrelated Business Income Tax. Be sure to research this and consult with a knowledgeable in this are CPA.

Dan Liptak · Answer

@Ned Carey Thanks for chiming in again I did hit google after having more questions and the answers I got were spot on to what you say...  You really know your stuff.  Yea with a sdira that would only be used for the investments that really are hands off run by contractors and managers... etc

Even the charging company for my labor seems too aggressive for me as of now my tax rate isn't bad at all.  I believe the tax code is more than fair and do try my hardest do my taxes right no need attract unwanted attention even if its legal unless the potential benefit far outweighs the possible scrutiny in this case it doesn't.

Hey @Ned Carey posted the details of my deal and what I am trying to do in PRO section.  I would love to get your opinion if you get a chance.  Thanks again +1Vote

Dan Liptak · Answer

@Linda Weygant Thanks for the input.  I have always enjoyed and prided my self in setting up my own corporations and doing my own accounting.  Maybe I should consult with a REI CPA it seems to be the consensus here anybody have a good recommendation in Westchester, Putnam, or Dutchess counties NY.  Honestly I have called in the past and even sat with some then I start talking about the LLC's, Real Estate, SD IRA, 1031's and all I see are blank stares perhaps someone knows someone in my area that is familiar with what we do.

VESTING IN LLC... WHAT TO DO?

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