With the tax breaks that come along with owning a business, should I register as a business before I start flipping houses? I'm just concerned that the money gained will count as income which could be a tax nightmare.
@Tomiko Graves Tax nightmare? That means you are making money. This reminds me of the movie Shawshank Redemption where the guard it mad that he is inheriting $50K because he'll have to pay taxes.
But to your point, a business will not reduce your tax footprint at all.
Thanks for the quick responses! @Anthony Angotti I will definitely consult with an accountant. I'm currently checking out some referrals now. @Larry T. totally get it. I guess it's a good problem to have...
@Tomiko Graves I had the same question; I got quite a few good answers to my question
@Tomiko Graves An LLC is a legal entity, with no bearing on taxation. You can chose to have it considered a disregarded entity for taxes (in which case it income will flow to your personal tax return), or inform IRS you want it considered (and taxed) as an S- or C- corp.
Flipping is considered active income and it will be taxed at your personal highest tax rate, if done without an LLC or with a disregarded LLC. There are some reasons why flipping might be better in an S-corp (in terms of expenses, salary, maybe formation of health plan and Solo 401K, etc.), for which you should consult a knowledgeable CPA, but those revolve around shifting areas of taxation and deriving additional benefits.
You'll want to do your flipping in an LLC (and if you plan on doing multiples, you should look into Series-LLC) for liability purposes (, so that if a buyer of one of your flips comes back years after the sale with a lawsuit, you are protected).
One way or another, the money gained from flipping is active income and you'll have to pay taxes for it.
@Costin I. Thank you for that breakdown. This is very helpful.
@Costin I. I'm finding that there are some HMLs that only lend to entities.
Thank @Wiley Strahan . The other comments were helpful.
I would recommend setting up the LLC first if you're looking to do flips. The reason being is that one of the option for reducing taxes on active income (such as flipping) is by utilizing an S election...which is an election made on an LLC.
So if you do 2 flips in your personal name, make $100k then go to a CPA....You can't do a ton at that point. They weren't done in the business.
However if you do 2 flips in an LLC, make $100k then go to a CPA before year end....you still have an option to make that election and potentially save you some money on taxes.
@Natalie Kolodij Thanks so much for the advice! Very insightful.
I am going to get investors in order to buy at a tax sale. It will be done via an LLC. Are there special issues related to forming the LLC for this purpose? Securities, etc?
@Michael Jackson if your investors are passive investors yes you have securities issues. Passive means if they are not actively involved in the business or decision makers. Even if they technically have the legal right to be involved but it is clear they are relying on your expertise, then you can still have a securities issue.
Then next issue is how are you going to make money? Tax sale is both extremely competitive and quite risky. With interest rates being bid down to 5% or less, how can you offer your investors any reasonable return and still have money left over for you?
Yes I know you can buy properties at higher interest rates but this is the very riskiest part of the market.