1031 flips? and business structure

[Caleb Mclamb]

Hello BP! 

Two questions: can you 1031 a house that you have flipped into your next flip?

and also what business structure is best for someone who plans to do a few flips to build capital for B/H MFR properties?

I know LLC is the automatic answer, but why do people not use S or C corp? would they not provide lots of opportunities for tax deductions that an LLC cannot provide?

Thank you for any insight.

Also, if there are any helpful articles directly related to the subject please point me towards them! 

[Jon Holdman]

No.  1031 is only applicable to investments, not inventory.  Houses you own while fix and flipping them are inventory, not investments.

An S-corp or a LLC taxed as an s-corp is the best bet for fix and flipping. Maybe. It provides no deductions you can't take as just an LLC or sole proprietorship. What it does is allow you to take out some of the profits as distributions. Normally all profit from fix and flipping is ordinary income and so is subject to self employment tax. That's both halves of medicare and social security. If you make enough profits to pay yourself a "reasonable salary" you can have the s-corp distribute some of the profits as salary (subject to SET) and some as distributions (not subject to SET, though its still subject to ordinary income taxes.) So, if you have enough income from the fix and flips to exceed an "reasonable salary", then you may have some savings.

That assumes you don't have a day job.  If you do and the day job maxes out the social security income, then your flips won't generate social security tax.  Medicare is unlimited, but is the small piece of SET.

A C-corp is very unlikely to have any benefits and probably has significant negative implications.  A C-corp pays corporate tax on its income.  Then it distributed dividends to its shareholders.  When then pay tax on the dividends.  A C-corp can deduct certain fringe benefits (health, dental, some others) that others can't.  But unless your operation is quite large this probably won't offset the double taxation.