Corporate setup for Rehab Flips and Income properties
Introduction and background on questions:
Currently we are a 2 man operation that is a 50/50 partnership. We will not have any additional partners in the future and we are not interested in selling part ownership of our company to generate capital. We want to flip properties to generate cash that will be used as down payments to buy income properties that generate positive cash flow. We are not looking for a small-time solution. Rather we are interested in a structure that we can grow into.
The following questions are specific and will help supplement our attempt to answer a more general question: What is the best long term corporate structure for our business? How can we best limit liability on our rentals and save on taxes from our flips AND use that cash to buy more property that must also be protected through separate LLC's?
1. Assume one LLC (with standard pass through tax characteristics) already had 3 properties in its name. What are the full tax consequences of splitting off 2 of those properties into their own LLC's so that all properties have their own LLC's?
2. Assume we have an entity (C corp or S corp or LLC that is taxed like a corporation) which does flips and consequently is eligible for many tax deductions and avoids paying Social Security and Medicare taxes. How do we use the capital that is trapped in that corporation to buy income property that would ultimately reside in another LLC? Can you buy the property with the corporation and then transfer it to its own LLC tax free? Can you start a new LLC and then have the corporation lend the money to the LLC to buy the property and therefore avoid gift taxes or any other taxes that might apply in this situation? The same question in a different way: Is there any way to do flips without paying Social Security and Medicare taxes and use that capital to purchase rental properties that end up in another LLC?
3. Assume there were 3 LLC's each with a single property. Let's say that one of the properties had a cracked driveway or something and a tenant tripped and incurred multi million dollar damages. Do they HAVE to sue "the owner" of the property which is the LLC or is it at all possible to sue us as individuals? When do they have grounds to sue us personally as opposed to the LLC? We understand that if we get into a bar fight and kill someone that all of our personal assets and our interests in the LLC's assets are at risk. We also understand that if we personally installed a water heater (or hired a non-licensed handyman) at one of our properties that blew up and killed someone that we would also have a similar fate (this implies direct personal negligence on our part). But where is the line drawn when it comes to negligence? Is a "slip and fall" or a carbon monoxide leak or anything else of that nature, considered personal negligence on my part? What is the REAL difference between putting properties in their own LLC's as opposed to lumping them all together in one LLC?