Hi,
I am doing a flip with a single member LLC and if the sale proceeds is being directed towards my personal name in my personal bank account, then this will trigger as W-2 income?
Whether proceeds are sent to an account for your single member LLC or to an account in your personal name, should make no difference for your income taxes.
However, selling a property owned by the LLC and having the money come directly to you violates the integrity of your LLC. In a lawsuit, any good lawyer could probably get your LLC thrown out.
Whether proceeds are sent to an account for your single member LLC or to an account in your personal name, should make no difference for your income taxes.
However, selling a property owned by the LLC and having the money come directly to you violates the integrity of your LLC. In a lawsuit, any good lawyer could probably get your LLC thrown out.
W2 income is for jobs. What you have is a regular business income. The tax rate on your net (after expenses) profit is the same as a W2 job, plus - most likely - a 15% self-employment tax.
As @Greg Scott said, personal bank account vs LLC bank account does not make any difference, but this likely defeats the purpose of having an LLC for legal protection purposes. I'm not an attorney though, so I'm not qualified to give legal advice.
Dissolve the LLC as it sounds like there's zero chance you haven't co-mingled funds or personally signed documents the LLC should have signed already.
If you assume the taxes to be $30k or more. Hold the property as a rental for a year and cut your taxes about 50%. The tax savings will equal $1,200+ per month. If the taxes will be less than that probably just sell and move on. But. Make sure your CPA is informed and lets you know if you’re going to owe the 15% self employment tax and/or the 3.8% Medicare surcharge (NIIT) as well. You don’t want to get hit with penalties and interest on top of it.
Hey Havan, definitely agree with the Greg and Michael. Sending the proceeds straight to your personal account won't magically change your tax structure, but it will likely pierce your LLC's corporate veil, destroying your legal protection.
Keep the money in the LLC account first, then distribute it to yourself properly. Also, definitely look into Bill's point about holding it longer if you want to avoid that heavy short-term capital gains/self-employment tax hit!
Thanks all for replies. I am planning to dissolve this LLC after the sale immediately so I believe it shouldn't be any liability concerns if sale proceeds directed to my personal account.
This would be self employment income. I'd work with a cpa to determine if it's worth becoming an s corp for your flipping business or not. I'd also look to see if there's options to mitigate tax as well as you'll otherwise be hit with self employment tax plus ordinary income tax
Others have covered your question already. However, one thing to think about from the tax reporting side of things....
Make sure you are keeping track of all carrying costs across the board. Debt service, utilities, rehab costs, etc. This all goes to your CPA come tax prep time. If you leave some out, you are only hurting yourself.
Short answer is no, it won't turn into W-2 income. W-2 is for wages from a job. A flip is regular business income, so your net profit after expenses gets taxed at ordinary income rates and, on top of that, you'll most likely owe roughly 15% in self-employment tax. Where the money lands doesn't change any of that. Sending the proceeds to your personal account instead of the LLC's account gives you the exact same tax result, but it can undermine the liability protection the LLC is supposed to give you, since commingling funds is one of the easiest ways for someone to pierce the corporate veil in a lawsuit. Better to run the proceeds through the LLC first and then distribute to yourself cleanly. As always, the exact numbers depend on your specific facts, so it's worth running it by your own CPA.
I recommend finding a good real estate focused accountant, so many beginner flippers make huge tax and bookkeeping mistakes, which can be easily avoided by contracting a professional.
To answer your question, the proceeds are just proceeds and are not treated as W2 income. What is taxed is the difference between all income and all expenses generated by that flip. Here is the formula:
Net income = sale price of the property - sale closing costs - purchase price of the property - purchase closing costs - construction costs - holding costs.
If the LLC is not taxed as a corporation (by default, it is not), then this net income becomes your self-employment income, reported on your Schedule C. And it is subject to both income and self-employment taxes.
No, @Havan Surat, the fact that the proceeds land in your personal bank account doesn't determine the tax treatment, a single-member LLC is a disregarded entity by default, so all the income and activity flows through to your personal return regardless of which account the money actually sits in. Where the funds get deposited is just a banking/logistics detail, it doesn't change how the sale is taxed.
What actually determines the treatment is the nature of the activity, not the destination account. A flip is generally treated as active income subject to ordinary tax rates plus self-employment tax, since flipping is typically viewed as a trade or business (you're buying, improving, and selling with the intent to profit from that activity, not holding for investment or rental purposes), so it's not going to be reported as W-2 income, it'll show up on Schedule C, and self-employment tax applies on top of ordinary income tax. That's different from a long-term rental, which gets much more favorable passive treatment.
One thing worth flagging: since it's a single-member LLC and this reads as dealer/flip activity, it's worth checking with a CPA on whether an S Corp election makes sense once you're doing enough of these, that can help reduce the self-employment tax hit on the profit, though it comes with its own tradeoffs and requirements. Worth sorting that out before your next flip rather than after this one closes. Happy to connect!
if you make good money, would recommend to make an election for 1120S (S Corp) and take it to professional level of business dealing to prevent personal involvement in terms of transactions and safety net to protect investment and returns on it.
A single-member LLC is automatically treated as a disregarded entity by the IRS for tax purposes. This means the IRS does not see the business and you as separate financial taxpayers; all financial activity flows directly onto your personal tax return
