Capital Gains and Business Entities

11 Replies

Hello everyone, I am trying to get somewhat of a plan together before I jump into this. If I have no business entity at all and buy a house in my name and do a flip, how would the capital gains tax hit me? Versus if I had an LLC, S-corp/C-corp or even a DBA? I am just starting out, so should I even make an entity at this point?

Thanks for your help!

And can I do a 1031 exchange without an entity? 

Flipping generates ordinary income, not cap gains, no matter how you structure it.  No 1031 for flips.

@Tony Bandinelli  Any tax paying entity can perform a 1031 exchange whether  you are individual tax payer or a corporate structure.  That is not the issue.  @Wayne Brooks  is right .  You would not qualify for 1031 exchange in this case because your intent as stated is to "flip" the property.  You holding it only for resale rather than holding it for ..."productive use in business, trade, or for investment" as the statute states.   How you demonstrate your intent can come in many different ways.  

Once you change your model to where you are buying with the intent to use for productive use rather than buying with the intent to sell, treating that property as inventory, you may qualify for 1031 treatment.

That is a huge bit of information I missed! Thanks guys!

So, if I am just getting my feet wet with a flip, I know it would probably be in my best interest to create an entity, but is it really necessary for my first one or two flips?

Tony, you can do it in your own name if you want but then all liability is on you as an individual. If someone were to get hurt and then sue, they are suing you. If you have an LLC then most you can lose is what the entity holds. **This is my understanding of it. Could be wrong but I think that's the case. I did my first one in my own name but that's because I didn't know what I was doing. Opened an LLC for the last two and it's just easier for setting up company checking accounts, credit cards, etc.

Originally posted by @Tony Bandinelli :

Hello everyone, I am trying to get somewhat of a plan together before I jump into this. If I have no business entity at all and buy a house in my name and do a flip, how would the capital gains tax hit me? Versus if I had an LLC, S-corp/C-corp or even a DBA? I am just starting out, so should I even make an entity at this point?

Thanks for your help!

 You cannot 1031 a flip.

Also it is business income and not capital gain income. It is taxed at ordinary rates and is subject to SE tax if not done inside of an entity. 

Honestly insure very well and do it outside of one for your first to determine if you even want to continue to do so.

Originally posted by @Zach Mitchell :

Tony, you can do it in your own name if you want but then all liability is on you as an individual. If someone were to get hurt and then sue, they are suing you. If you have an LLC then most you can lose is what the entity holds.

This is very true but you can also shield yourself from liability with insurance and common sense (making your sure your contractors have insurance!).  LLCs have annual administrative costs and a layer of administration which can add up depending on the size and timeframe of your deal - so that is really a judgement call.  If the deal is small and short enough, you may not gain too much advantage by creating an entity.