My husband and I are slowing flipping homes. We live in each flip while we rehab and then sell. Can I treat these flips as a sale of my home? Until I get to a point that I no longer live in them? That way I still pay tax, but not Self Employment Tax. My husband is retired military, would his retirement pay be considered a "full time job", as it is income unrelated to flipping?
Also, I keep reading about placing each property in it's own LLC. Is the point of this for reducing taxes, or reducing liability (for your personal assets)? How would the sale of the LLC be treated for tax purposes? And most important, how do you convince a buyer that they really are just buying a house, not a company? What does the buyer do to dissolve the LLC?
A few thoughts on this...
I would say physically living in a property for a set amount of time allows you to maintain an argument that you are holding the premises for speculative / investment reasons, thus avoiding dealer status and employment tax. Obviously, there are extremes of this which could cloud that argument (living in the property for 30 days, then selling and maintaining a pattern of this over and over again).
As for selling the LLC versus the home...this is another technique that folks use to try and receive capital gain treatment on properties versus dealer treatment. In theory this works (the threshold the IRS has to prove a taxpayer is a dealer in securities, business interests, etc. is MUCH harder to prove than the threshold in real estate). However, it would seem your pool of buyers gets decreased a bit by going this route. The attorneys on the buyers side frequently advise against stock and LLC interest purchases as the buyers are also purchasing whatever liabilities (known or unknown) come along with the assets of the business (DISCLAIMER: I am not an attorney, consult your own for actual legal advice).
If you are looking to structure a model that helps you avoid dealer taxes, talk with a tax pro that has experience in this field. Every client is different and what matters the most in determining dealer status is your own, unique situation.
Nathaniel Busch, CPA
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