LLC vs Personal Name

10 Replies

Hey all,

I wanted to get everybodys opinion on my situation. I want to take the hardest step in the real estate investor world; BUY MY FIRST PROPERTY.

I wanted to ask is there any benefits of completing a flip under an LLC vs my personal name in terms of tax? I don't want to spend 50% of my profit in capital gains tax, although I don't think there are any ways around it without a 1031 exchange. I want to take my profit and pay for my whole college tuition.

Thanks,

Tom B.

F/Y/I

This would be done all in NYC

@Tom Bud an LLC provides asset protection not tax help. I wouldnt do a flip without one, for alot of reasons. You could also do this in a Self Directed IRA No taxes then, make sure not to self deal. It also unlikely you will pay half in taxes, you also get to write off expenses such as mileage and home office, ect, if done outside an IRA. No accounting advice not an accountant.

Great answer Jeremy.

As @Jeremy Tillotson says, the LLC is not likely going to give you any kind of tax break. I'm not a corporate entities lawyer or an accountant, but my understanding is that taxes for LLCs are pass-through (i.e., profits and losses "pass through" and are reported on the owners' 1040).

The LLC exists to insulate you from liability in the event there is a claim against you or your business arising from the property. Short answer is that theoretically, your personal assets are separate from the LLC's assets and cannot be used to satisfy a judgment against the company. In other words, you only risk the company's assets. I say "theoretical" because there ARE things you can do (without knowing you're doing them) that will legally allow the court to disregard your corporate status and go after personal assets. So, if you're going the orporate entity route, DO talk to lawyers and accountants to make sure you set up a process that avoids these pitfalls.

Good luck!

Properties that you acquire for rehab/flipping do not technically qualify for 1031 Exchange treatment.  Properties must be held for rental or investment purposes in order to qualify; properties that are bought for rehab/flipping are technically held for sale, which is the reason they do not qualify.

Thanks for the input everyone!

Originally posted by @Bill Exeter :

Properties that you acquire for rehab/flipping do not technically qualify for 1031 Exchange treatment.  Properties must be held for rental or investment purposes in order to qualify; properties that are bought for rehab/flipping are technically held for sale, which is the reason they do not qualify.

 Hi Bill,

To the point of taxes, is one able to claim business expenses without a TIN? I've read that starting out, it's better to not spend all the time and expense of starting a company but you can still file a schedule C. Do you need a TIN to file a schedule C?

Thanks, 

Erin

Hi Erin,

No, you do not need to form a company, and you do not need a separate Taxpayer ID Number.  You can conduct business under your individual name, use your social security number when a Taxpayer ID Number is needed, and report everything on Schedule C and/or Schedule E, as applicable. 

I'm no CPA, but I have been advised to transition my flips out of an LLC and into a S-Corp so excess profits can be paid in dividends. If you're not doing a lot of volume, this wouldn't make sense, especially when considering the time and money costs of creating and maintaining a legitimate company (including an LLC). I also have a very unscientific opinion that some distressed sellers (and a lot of banks) prefer accepting comparable offers from individuals. If you change your mind and hold the property as a rental, you could always quit claim it into an entity when you're ready.

I don't know how it is in NY, but in IL you cannot purchase a property under an LLC. you can purchase in your own name and then deed the property to an LLC if you so choose, but the extra cost and time associated with this process doesn't make it worth while doing on flips.

I was told by @Brie Schmidt that some commercial lenders would allow you to buy a property under an LLC, but they typically don't lend on properties less than $500K. If I'm remembering this correctly.

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