How to Structure my Real Estate Business

Question

Whats the best way to structure your LLC as a business. I'm starting my own in Chattanooga, TN. I'm looking to do both fix/flip as well as rental properties. Do I need to structure as an Individual LLC or a corporation LLC?

Jake Hottenrott · Answer

I just had to sprint over to the computer to prevent this from going to far.  DON'T MIX ACTIVE ACTIVITIES AND PASSIVE ACTIVITIES IN THE SAME ENTITY!!!!!!!!!!!!

Fix and Flip - LLC or LLC taxed as an S.

Buy and Hold - LLC or held in personal name

William Allen · Answer

I would recommend structuring as an LLC and being taxed as an S Corp to minimize your self employment tax.  You will need to pay yourself a reasonable W-2 wage to execute this.  However, there are a lot of variables that could change that recommendation.  Get with a CPA or do some reading on the advantages of using an LLC taxed as an S corp or setting up a corporation from the start.  I'm just giving you one guys recommendation and how I structure my business.  If you are just getting going, create an LLC, start making some money, then you can figure it out once you have revenue coming in.  It doesn't matter how you structure your company if you aren't making money.

Natalie Kolodij · Answer

Account Closed

There are a couple rules here. The IRS looks like if you provided services for your short term renters (breakfast, cleaning) ect....but also they're definitely looking at length of stay.

Typically if the average rental time is 7 days or under it gets classified as active and moves to Schedule C (like any other business subject to SE tax) and is no longer reported on Sch E (like a rental)

Ana Garcia · Answer

@Kendall Seals As everyone above mentioned, you would do two LLCs, one for the flipping business and another for the rental business. The flipping LLC would elect to be taxed as an S-corp - this is done to reduce the portion of self-employment taxes paid because flipping is not considered a passive activity and you are responsible for paying SE taxes. Renting is considered passive, does not result in SE taxes and, therefore, does not require an S-corp election.

BUT before creating the LLCs, it may be a good idea to speak with a lawyer or even a CPA who can analyze your specific situation and determine when you need to create those LLCs/when you need to be protected.

-Ana

Brian Levredge · Answer

Lots of great advice in this thread.  I'm a local investor myself and something you'll need to consider with an S Corp or LLC here in TN is that you will be subject to the F&E tax.  There is an exemption for rentals (up to four, residential units) but you still need to file the paperwork annually.  Were you to do either activity in your own name, general partnership, or trust (generally) you wouldn't be subject to the F&E tax.  There are advantages and disadvantages both ways so have a good conversation with both a CPA and attorney, preferably who both invest themselves.

Kendall Seals · Answer

loving this advice. Thanks for the tips!

William Allen · Answer

I keep my rentals in my personal name with heavy insurance coverage, my flips and wholesale (active work) are in my LLC taxed as S corp.  I didn't notice that you said you wanted to buy and hold as well.  I agree with separating the two whether that be personal name or LLC.

Jeffrey Bibby · Answer

In most cases for the flip side of the business you would structure an LLC taxed as an S-corp and the buy and holds in an LLC taxed as a partnership if multi member and on your Sched E if SMLLC. But you should talk to an Attorney about the structure and a CPA about how it should be taxed.

How to Structure my Real Estate Business

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