Flips that turn into holds

Tax, SDIRAs & Cost Segregation
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Flips that turn into holds

Account Closed
CA · Member since 2011 · 762 posts · 182 votes

What is the best entity structure for a business that buys then sometimes holds and sometimes flips?  It's not always easy to know ahead of time if you are going to keep or flip.  So it would be nice to just have both flips and holds in the same entity.  I don't object to owning in my personal name but this is a partnership and it's best I think to have a more formal structure.

The conventional wisdom is to flip in a S-Corp and hold in a LLC, but it's a pain to have two entities, especially in CA.

It's not talked about much but I'm thinking of a LP (Limited Partnership). What's neat about that is that it avoids the gross revenue tax that is imposed on CA LLC's (even if you lose money on a flip you pay taxes on the gross revenues from the sale). I'm just not sure it' wise to flip and hold in the same entity.

I will eventually talk with a legal/tax pro so don't worry about giving advice.  I'm just trying to get ideas.

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  • Larry Turowski
    Flipper/Rehabber · Rochester, NY · Member since 2014 · 1k+ posts · 1k+ votes
    12y

    @Account Closed I have this same issue.  I am prepared to keep some flips, but I don't always know which one.

    Talk to your accountant. My accountant advised me to buy and rehab a flip in an S Corp, and then if I keep it, deed it over to the LLC and do an asset transfer in QuickBooks.

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  • Account Closed
    OP
    CA · Member since 2011 · 762 posts · 182 votes
    12y

    @Larry Turowski 

    That may be what it turns out to be.  The only down side I can see, apart from multiple entity cost and adminstration, is that title seasoning is extended by the amount of time help in the s-corp if you want to get a loan for the hold.

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    12y

    Another downside is paying transfer taxes if those apply in the location of the property. 

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  • Walt Payne
    Real Estate Investor · Sebastian, FL · Member since 2014 · 812 posts · 432 votes
    12y
    Originally posted by @Account Closed:

    What is the best entity structure for a business that buys then sometimes holds and sometimes flips?  It's not always easy to know ahead of time if you are going to keep or flip.  So it would be nice to just have both flips and holds in the same entity.  I don't object to owning in my personal name but this is a partnership and it's best I think to have a more formal structure.

    The conventional wisdom is to flip in a S-Corp and hold in a LLC, but it's a pain to have two entities, especially in CA.

    It's not talked about much but I'm thinking of a LP (Limited Partnership). What's neat about that is that it avoids the gross revenue tax that is imposed on CA LLC's (even if you lose money on a flip you pay taxes on the gross revenues from the sale). I'm just not sure it' wise to flip and hold in the same entity.

    I will eventually talk with a legal/tax pro so don't worry about giving advice.  I'm just trying to get ideas.

    A down side of NOT doing them in separate entities is being declared a dealer, and having your depreciation on buy and holds RETROACTIVELY disallowed. Which means your previous years taxes were wrong. So you owe all kinds of taxes and penalties. However you do it, keep the two in separate entities. And in typical IRS fashion, there are no hard and fast rules on being a dealer, just a judgement call. 

    BTW you can flip in an LLC, and have it taxed as an S-Corp. I believe that is a one time, irrevocable election if you choose it.

    Also, I agree it is hard to know sometimes which is best, but I know most flips will be rehabbed different from fix and hold, so you need to decide by the time you buy anyway. Sure, if you switch to a rental as an alternate exit strategy you would switch entities it, but that should be the exception.

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  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    12y

    the problem with this is any transfer out of a corporation is automatically distributed at fair market value that means the corporation must report of sale based upon the fair market value mm. This expensive against it it will then also recorded distribution for the full fair market value to the shareholder. If you do so from a c corporation your dinner it is reported to you will be the fair market value and the corporation must still report a sale of the property.

    What is highly recommend and things such as a family limited partnership is allows you to send to you do so underneath one umbrella.

    Walt I will say that most of the information in your post is not correct there are very detailed specific to each property is considered on its own individual basis as to whether or not it was a transaction as a dealer or if it was truly a buy and hold. now if you are doing so as a corporation it gets trickier. As you want to keep activities separate.

    [email protected]224-381-2660
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  • Account Closed
    OP
    CA · Member since 2011 · 762 posts · 182 votes
    12y
    Originally posted by @Steven Hamilton II:

    the problem with this is any transfer out of a corporation is automatically distributed at fair market value that means the corporation must report of sale based upon the fair market value mm. This expensive against it it will then also recorded distribution for the full fair market value to the shareholder. If you do so from a c corporation your dinner it is reported to you will be the fair market value and the corporation must still report a sale of the property.

    Seems reasonable that 'fair market value' would be purchase price + rehab, therefore no net gain to report on the sale when transferring from s-corp to LLC?

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  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    12y

    David,  

    Not if intent was to flip. There is probably some built in gain to worry about. Not to mention if there was a loan on the property you run into major basis issues as debt is not considered part of basis in an scorp.

    [email protected]224-381-2660
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