As I said in the wholesaling thread, I am going to start wholesaling properties but was curious as to whether it is recommended if I set up an LLC, I have read somewhere that if I don't then the IRS will consider me a dealer (don't know what that means). Help on this would be great.
As well, what kind of taxes can I expect to be paying when I do wholesale these properties and is there a way that I can lesson the amount that I pay?
Any suggestions are helpful.
Don't think an LLC will help with taxes because its a flow-through entity for taxes.
Someone who runs a shoe store and buys and sells shows is a dealer in shoes. You buy shoes for $20, sell them for $40 to create a $20 gross profit. Then you deduct your expenses and come up with a taxable amount.
A "dealer" for real estate is the same thing. You're not an investor, in the IRS' eyes. You're the same as the shoe seller. So, you get the same tax treatment. You also lose some of the other special treatments for real estate investments. The houses you buy and sell aren't investments, they're inventory.
You'll pay tax on the gains as either short term capital gains or ordinary income. The rates are the same, whatever your marginal rate is.. You may have to also pay SET (self employement tax). This is social security and medicare. If you have a salaried job, half of this gets paid by your employer, half by you. As a self employed person, you'll pay both halves, about 15% total. There are ways to structure your entities to avoid some of the SET, but I can't explain exactly how to do that. There have been some posts on that topic, so do some searching.
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