First deal - deeds, corp structure timing, transfer of ownership

12 Replies

Hello - I just acquired an abandoned property (absentee owner), the current plan is to flip it. The longer-term plan is for my fiance and I to buy-and-hold with flips to build working capital. We have no corporate structures set up yet. A few questions regarding corporate structures, transfer of title etc.

 This is a sub-50k house, estimated pre-tax flip profit is around $20k ($19,747 to be exact). Margin are clearly tight but I am using this more as a case-study and to learn the process. 

We are currently in escrow as a FSBO deal. This is the plan for the current property acquisition:

1. Close escrow with title in my and my fiance's name (a single man /a single woman). 

2. Concurrently, form an S-Corp, fiance and I will be 50/50 shareholders (S-Corp to minimize SET and limit personal liability) - to be used for this property and future flips.

3. Transfer property to S-Corp via a Warranty Deed or Quit Claim Deed.

4. All expenses and profits from the flip to be handled within the S-Corp. 

So questions: 

1. Am I on track with the above plan? Any feedback/suggestions? 

2. My parents are loaning us the bulk of the money for acquisition/rehab and have asked this so reflected on a Deed of Trust. How does this fit in the above scenario and transfer of ownership (step 3)?

Apologies if this is convoluted - I've been giving myself a 24 hour crash course, so trying to get up to speed and still gaps in my knowledge. 

Thank you!

Why are you buying this in your own names first? Why not buy it in the S corp? This will save one set of transfer taxes and simplify things. 

If you are going to flip it why do the S Corp?


Joe Gore

Ned - We haven't formed the S-Corp yet. Flipping was not the original intent - we originally were going to hold the property, then this weekend, after running the numbers and getting to know the neighborhood more, decided on flipping it instead (actually, specifically, we're going to try to sell as-is, and it doesn't sell, we'll fix it up and flip it then). 

Joe - After running the numbers on the self-employment tax implications of flipping, based on what I've been reading on biggerpockets, it seems that an s-corp is the way to go in order for some of the profits to be taxed as dividends instead of ordinary income. 

I find it interesting that you came up with potential new profit of $19,747. It'll be remarkable if your actual numbers are accurate, given the number of variable factors and a market that may be softening.

You don't mention what State this property is in. If in your home state (and mine) CA, we use grant deeds to convey an assured, affirmative interest.

Not sure what you are asking concerning your lender/parents. You will presumably repay them according to the terms set forth in the note that the deed of trust secures. Both the debt and and associated expenses concerning that debt will be deducted from your (hopeful) profits and the net will be taxed based, at least in part, on the length of time that you owned the property.

I agree with Joe Gore that, for one property, all the corporate stuff is really not necessary, especially if you don't really have any assets to protect, plus the fact that, if anything goes wrong, taking title personally and subsequently transfer to an S Corp. won't exactly hide ownership or protect you.

For convenience and some level of privacy, you ought to consider ownership vesting in a title holding trust. One corporate entity acts as trustee of a title holding trust. No real asset protection but you can set up a THT in about 10 minutes to acquire each future property using a 3rd party trustee very affordably. Saves the cost and hassle of you setting up a corp., etc.

Check out Ward Hanigan's ForeclosureForum (dot) com site and decide if you want that type structure. He also teaches a one day THT course for DIY people.

Really, focus on making a profit first. If you end up having anything to protect, invest in trust education and corp structure training.

@Rick H.   Thanks much - I'll check out Title Holding Trusts. 

The purpose of this property is to provide a foundation (learning, building relationships, etc) for future deals and secondly, to maximize profit. So I realize that perhaps an s-corp isn't worth setting up for to maximize profit for one property, but if it comes out as slightly beneficial in terms of cost, then it will be worth it for me that I'm setting up an infrastructure for the long-view. Of course, if it is onerous to set up and maintain, and cost-neutral or worse, then it might not be worth it to set up. 

The primary reason for the s-corp is for tax savings. On the Bigger Pockets forums, S-Corp appears to be a popular (but not universal) choice for flipping, as an s-corp would help with avoid profits all being taxed as ordinary income (Federal, State, and then an additional 15.3% for both sides of FICA).

In my case, tax rate something as follows:

INCOME TAX

  • - Federal (up to 36.9k): 15.0%
  • - CA State (up to 39.3k): 8.0%
  • - FICA - both sides of medicare and social security: 15.3%
  • --------
  • - Total Ordinary Income Tax Rate (Fed+State+FICA): 38.3%
  • - Total Dividend Tax Rate (Fed+State): 23.0%

I could be calculating this wrong, but for the flip scenario, I'm estimating the numbers as follows (just updated them to reflect new financing terms and flat-fee MLS):

  • - Purchase Price: $14,000.00
  • - ARV: $60,000.00
  • - COST Rehab: $18,000
  • - COST 5 months of holding costs (flip insurance, debt, utilities): $1,727.50
  • - COST Closing costs (flat-fee MLS and marketing/ 3% buyers realtor fees/ county transfer tax/ 2% closing costs): $3,465.00

PRE-TAX PROFIT: $21,707.50

Applying the above tax table, the post-tax profits appears to be as follows: 

  • - No S-Corp total taxes (100% taxed at 38.3%): $8,313.97
  • - With S-Corp total taxes ($1,500 taxed at 38.3%, remaining taxed at 23%): $5,222.23

So, assuming my numbers are correct, with an S-Corp, it's a tax-savings of around $3,000. Not a huge savings perhaps after subtracting cost to set it up, but if I'm saving some money AND its a structure I'll need for future deals, then it seems worth it to me. 

Really open to correct or feedback from all - I'm trying to learn as much as I possibly can on this deal. 

Not a CPA but wouldn't the $22k profit be split more like 50/50 between salary and dividend thus $11k taxed at the higher rate of 38%?

Since your profile shows LA, I'm assuming a CA S-Corp when I say don't forget the 1.5% state corporate tax.

@David C. - Thank you - modeling with those numbers, looks like the s-corp tax benefit would be $1,335.01 - perhaps not worth the tax-time hassle. 

Still an open question regarding how to reflect my parents on a deed of trust. What is the relationship between the deed of trust with my parents and the current escrow process transferring ownership from current owner to me? Should this deed of trust be somehow reflected in the escrow closing papers? 

@Jenna Y.  

You seem to have a grasp on flip profits and taxes, but a minimal understanding of conveyances and liens, interesting combination of knowledge, nothing wrong with that.

My comments assume this property is in CA?  Sub-$50k house in CA ... hard to imagine.

You should speak with an attorney.  Having gotten that out of the way, if I were you, I would have escrow do a note and deed of trust for you, so, yes, it would be part of escrow closing papers.  Keep the note interest rate under 10% to avoid usury.  Also have a lenders loan policy for them as well.  All this assuming seller will be okay with you introducing a loan at this point in the transaction, banks often times are not, private parties generally don't care.

The note and deed of trust could be done after closing but better before, again, assuming seller is okay with it.

Account Closed - Thanks much! I gave myself a crash course on taxes and flip numbers this weekend, thus the knowledge, but you are correct, I have zero knowledge of conveyances and liens yet. Trying to learn as quickly as I can, give me a few days to get up to speed. :)

Your advice is tremendously helpful in pointing me in the right direction. Do you have a RE attorney that you could recommend? 

I am purchasing outside of LA/Orange County, there are still some sub-50k properties in the outskirts. :) We drove around looking for abandoned properties we liked for a buy/hold, culled the list to 12-15 properties meeting specific criteria,  then I located the owner's phone number (or family members) and we called them.

Why so secretive about what city/county the property is located?

Originally posted by @Jenna Y. :

 Trying to learn as quickly as I can, give me a few days to get up to speed. :)

 And I'm sure you will!

Sorry, don't know a RE attorney.  I may be able to help if you need a creditors BK attorney, eviction attorney, foreclosure trustee, mortgage attorney, trust attorney, syndication attorney, asset protection attorney, tax attorney, construction attorney, land use attorney.  Can't say I've ever met a RE attorney except maybe somebody that was just out of law school yet to decide what they want to do with their life...it's very specialized.

Somebody else may know a RE attorney in your area ... anybody?? it's a fairly simple transaction.

@Rick H.  - Ah! Perhaps I should re-state my question! :) Could you recommend an attorney that might be able to help with such a transaction? This is my first deal, so am building all my connections as we speak. 

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