Self Employed with rentals, and now a flip house

4 Replies

Hi All, I would like to get some help on how to best achieve my goal of flipping a property with the lowest possible  tax burden. I recently bought a home, and I had plan to resell it, until, a friend mentioned something about " dealer status" . I did not know about it since i was just a buy and hold investor.

I have two properties that i have been renting for 4 years, and they are all in my personal name, no LLC. I know many of your will scream at me for doing this so long, but i just never got around to putting those rentals in a LLC. My intention was/still is to flip this newly acquired property, so i put it in a newly formed LLC. So as i read about " dealer status", it seems like it would be best to have an S-Corp. Now the problem is i am a sole member LLC, and i did not elect S-Corp when i filed for a FEID # on the IRS site.

1. Can i go back to the IRS and update my LLC into a S-Corp ?

2. How do I distribute the profits ?  I understand that most people pay themselves a little salary so that they will only get hit 15.3% SET on part of the profit. Need clarification here.  

3. Will i lose depreciation on the other properties ?

I am self employed so no matter what i pay the 15.3 percent on my regular job.

The profit on your flip will be taxed as ordinary business income at your ordinary income tax bracket rate.  If your full time job pays you $118,500 or more, then you are already maxxed out on social security taxes and, for SET, you will just have to pay the Medicare tax of 2.9% (or 3.8% if your total income is over $200K) on your flip income.  

If this is your situation, may not make sense to worry about converting the LLC to LLC-S.

Hi @Lucky B.

1. IF, you needed to elect an S-corp classification you would submit Form 8832.

2. This question is hard to answer for your specific situation without knowing how  much you earn on your regular job. @Dave Toelkes did a good job with his explanation. 

3. The short and simple answer is No. You will transfer the property to the LLC, make the proper adjustments on the books for the initial asset recording then continue to depreciate for the remaining useful life.

@Senica Evans you may want to double check the forms you are recommending.

@Lucky B. If you are an LLC with a single member, you are by default classified as a sole proprietorship for federal tax purposes, and as such, there is no need to file Form 8832. Rather, you can make an S election by filing Form 2553. Moreover, if you elect to be taxed as a corporation on Form 8832, you are electing to be taxed as a C-Corp, not an S-Corp, and further reporting requirements would be involved to elect S-Corp status.

You need to file Form 2553 within 75 days of the beginning of the entity's tax (fiscal) year, otherwise a late filing in the current year will be effective for the following tax year.

So when did you establish your LLC?

Thanks @Brandon Hall , I was mistaken in saying Form 8832 when it is in fact Form 2553.  For a C-Corporation classification, Form 8832 would be used while an S-Corporation classification would use Form 2553. 

Guess I shouldn't be posting at 5:30 in the morning.

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