Investor · Atlanta, GA · Member since 2014 · 40 posts · 18 votes
We're starting our flipping business this year in order to fund our buy and hold strategy. And I understand that income from rehabs/flips is taxed at the highest level. However, we intend to use all profits for the purchasing of our long-term holds. I'd like to keep as much as we can using a corporation. Is this following feasible?
Set up a corporation, with minor payroll of the owners, but keep a majority of the flipping profits with the corp. and have the corp. then purchase the buy and holds.
Will that reduce our tax liability? We have every intention of getting direct legal counsel, but wanted to vet the question on the forum first.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
11y
What you do with income is not relevant to how its taxed. Income from flipping properties is EXACTLY the same as income from a shoe store. You get to deduct all your expenses, both the inputs (i.e., cost of good sold - the shoes you buy wholesale or the properties, labor and materials) and overhead (insurance, office space, etc.) but the net profit is taxable as ordinary income.
You may be able to shelter some of the income by using an s-corp. Because that's ordinary income, you must pay SET (self employment tax - social security plus medicare) on it. With a W2 job, the employee pays half of that and the employer pays the other half. With any self employment income, whether flipping houses or that shoe store, you pay both halves. If you do the flips in an S-corp or an LLC taxed as an s-corp, and you have enough income, you may be able to distribute part of it as salary (subject to SET) and part as distributions (not subject to SET). But the salary must be "reasonable", which is to say what someone might be paid to do a similar job.
There's no trick here. Fix and flipping is a job, not investment. Its taxed exactly the same as a W2 job. Doesn't matter what you're going to do with the money.
@Bill Walston, I was not saying that was the decision of Byram, I said to take a look at it. It is the beginning point of research on this topic. I am comfortable with the advice I gave, and have no need to spend hours on the legal research finding the support. If someone else wants to do that, I gave them a starting place. No, the decision is not relevant to the typical wholesaler. It is relevant to the original question, which related to a desire to engage in some flips to generate capital for long term capital gains. That is defensible as investment income, not ordinary income. And, while you are correct that only 7 flips were at issue, the history of 22 sales was a factor in the analysis.
Denise, That is not a good point to start with. those were specific facts and circumstances. In addition since 1983 we've had SUBSTANTIAL changes in the tax code.
In addition the definition of a few can be rather unknowing. MY suggestion is do not give tax advice unless you specialize in it or at least give a disclaimer that you are not a professional in that field.
@Bill Walston@Steven Hamilton II@Denise Evans - sorry to chime in here with a question so late - I see this post still has some life! Is it possible to use a Roth SD401k in this scenario, assuming @KJ D'Costa business entity qualifies - to contribute the maximum of the flipping income, and then access those funds via the 401k loan option? Understanding that the objective is to utilize the funds to purchase additional income properties, is this a viable option?
Thanks!
Keep in mind he would pay taxes on the income in that year. But he could still borrow from the account 50% of the balance up to 50k.
Home Stager · Sussex, WI · Member since 2012 · 170 posts · 64 votes
10y
@Steven Hamilton II - I guess the Roth 401K was a bad example - my mistake. Would you (or others )then recommend a non-Roth 401K for the loan options as part of an overall strategy to shelter income tax in the short term?
Investor · Minneapolis, MN · Member since 2014 · 743 posts · 927 votes
10y
why not hold for 1 year and 1 day while renting so you can utilize capital gains and drop the tax rate essentially in half. In my case I go from 44% to 22% so it pays for holding and I keep more money and am now self financing so I can do several flips in a year if I choose to.
Real Estate Agent · Kennesaw, GA · Member since 2015 · 308 posts · 153 votes
10y
Bruce Runn I was wondering this whole time if I could do that. Buy fix and rent out for a year then sell a year and a month after I bought it. So basically I would have a hold inventory that was turning over every year. I have two that are free and clear if I sell them both after a year I could significantly move up in the rehab to something with larger margins (the whole trade up thing).
Yes as long as you hold the property for at least 1 year and one day after you place the property into service "available to rent" any gain on the sale will be treated as long term capital gain.
Danbury, NH · Member since 2016 · 89 posts · 21 votes
9y
@Ryland Taniguchi Did you ever get an answer to your question about flipping properties with the same entity you do GC work for the general public with?