tax ID& incorporate?

12 Replies

I have a question, by the way im going to try flipping properties just have'nt gotton started.
My question is I live in massachusettes Im going to be flipping property in florida am I supposed to get a tax id number in MA or Fla?
Should I incorporate into a business and if so which state do I file that in also what kind? Sole proprietor, LLC,Co?
Any help would be greatly appreciated

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I'm a tax preparer and we have been in the real estate business for 20 years. We are not incorporated but do have a liability policy. We act as sole proprietors'. There are times when it would be smart to incorporate but for most small investors a good insurance policy is cheaper and less complicated.

See a CPA about establishing a general partnership. In CA a general partnership has a lot of the benefits of a corporation when it comes to takes and things without all the hassle. I think my partnership and all set up costs were under $1000.

Hi

In California, no matter what entity you create, there's always going to be the franchise fee.

A general partnership? Only if there is more than 1 partner. Whereas a single person can create a c-corp and pay him or herself a salary oiut of the corporate earnings. A single person can create an LLC which is disregarded by the IRS but offers some liability protection.

Again it's good to get the input of a CPA who is familiar with real estate investing and tax returns to determine what the best business entity is for a particular person and type of real estate.

I personally have run an S-Corp, a C-Corp and an LLC. Each entity was geared for a different kind of business.

Bird

Originally posted by "birdburd":
Hi
I personally have run an S-Corp, a C-Corp and an LLC. Each entity was geared for a different kind of business.

Bird


Just out of curiosity... is there any reason why you wouldn't choose to use the LLC? All of my research (for the state of Ohio anyways) seems to show that an LLC is a less restrictive version of an S-Corporation. For a single owner I think an LLC makes sense.

I've even heard of some people that will set up multiple LLC's and then have each one own just one building. The logic being that if one of the LLC's gets sued (fire, or whatever) then the rest of the portfolio is protected from that loss. Practically speaking though I'm not sure if it actually makes any difference when you go to court.

If you are going to be buying and selling property as your primary business, then you need to be a c-corp, or s-corp, depending on your tax bracket and the expected income level of the corp. C-corps are taxed at 15% for 1st $25K, 25% next $25K, then 35% after. If you are in a higher than 15% tax bracket for individual, and don't expect to generate more than $25K worth of income (not gross, but net), then be a c-corp until you start earning more income than that. The down fall is that when ever you pull money out of the C-corp it will be taxed at your ordinary individual tax rate, whether it is salary or dividends. The benefit of the S-corp is that you do not double taxation. It is a flow-thru and the ordinary income will be taxed your rate, but dividends are not taxed. Since you are buying the property to sell the property, it will be considered inventory and you should not use a partnership or LLC. If you are a partnership or LLC, you will have ordinary tax income and SE tax which is an additional 15.2% tax. If you are purchasing the property to be a rental unit, then you would benefit being a LLC since rental real estate is not subject to SE tax. You will get a FED TAX ID from the IRS for your company. You will use that ID for any required state reporting. Since this company will not do any business in MA, you will not need to file anything there unless they require you to file a franchise tax return because you are set up there. You would have to file in FL since you do business in FL and that would give you nexus. I think you need to check, I don't think FL has state income tax and you would have to file a franchise tax return, but you may be under the minimum and there would be no filing requirement. It should only cost you about $500 to set up a corp and about $1000-1200+ to set up an LLC. Hope I didn't confuse you more, but just think, there's more out there with this tax stuff!!!!!! Sorry I wrote so much, but a couple of lines is not going to get you the advice you need. LLC is not the best form for all businesses. Joe.

CPARETAXEXP,

Sir, you spoke of an SE tax. What does that mean? Also, I understand a little about the taxes and business entities - just enough to confuse me. I am cash poor, so for the short term (next 2 years) I am planning on mostly rehabbing to sell. Once my war chest is built up I'd like to do a 50-50 combination of rehabs to sell, and building a rental portfolio.

My main concerns right now are: 1) the best business entity for me - maybe a sole proprietorship is fine... 2) and how to minimize my taxes, even though I think the gov will classify my houses as inventory, putting me in the top of the capital gains tax bracket.

My great State of Texas has no income tax, and I'm not sure if this endeavor counts as a business in such a way that I should get a state tax ID. I think the only thing I know for sure is that I need a good real estate accountant. If anyone knows any around Dallas, I'd appreciate the lead.

Thanks for any answers you guys might send my way.

-Dean

SE tax = Self Employment tax.

If you plan on rehabbing repeatedly then you might want to use 1031 exchanges to defer the taxes. You don't need any special entities to do this.

Sorry, but I don't know of any accountants in Texas. You might try calling the state board of accountancy for Texas; they might be able to refer you to a specialist.

Dear drweltman,
IRS usually looks at the following to classify you as a dealer (list is not all inlcusive):
1) The number and frequency of Sales
2) Intent for Buying Property
3) Extent of Improvements
4) Holding Period
5) Income generated by RE sales
However, even if you are a RE dealer you can still own nondealer property (aka investment property). So if you do decide to hold on to some property for a longer period of time and rent it, make sure you keep properties separate from each other. If you flip couple properties you may be not considered a dealer. But if you are considered a dealer the following will apply to you:
1) Ordinary income/loss treatment
2) You cannot take depreciation
3) You will have to pay Self-employment tax
4) You will have to file Schedule C (profit or loss from business)
5) You can't take advantage of tax-free exchanges
6) You can't use installment sales

Originally posted by "drweltman":
CPARETAXEXP,

Sir, you spoke of an SE tax. What does that mean? Also, I understand a little about the taxes and business entities - just enough to confuse me. I am cash poor, so for the short term (next 2 years) I am planning on mostly rehabbing to sell. Once my war chest is built up I'd like to do a 50-50 combination of rehabs to sell, and building a rental portfolio.
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As stated before - Self-employment tax. 15.3% of your net earnings.
It applies to individuals schedule C, partnerships, but not to corporations nor to rental real estate activities.
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My main concerns right now are: 1) the best business entity for me - maybe a sole proprietorship is fine... 2) and how to minimize my taxes, even though I think the gov will classify my houses as inventory, putting me in the top of the capital gains tax bracket.
------------
For the best benefit, you should have two entities. Your buying & selling will be considered ordinary trade and business and would be subject to SE tax if you use an LLC, partnership or a sole proprietorship. You should use a corporation for this business and make an 'S' election. This would be ordinary income not capital gains income.

You will then have an LLC for your rental real estate portfolio. Since the rental real estate activity is not subject to SE tax, it is the best entity to be able to have negative cash flow, but you will be able to pull money out tax free.
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My great State of Texas has no income tax, and I'm not sure if this endeavor counts as a business in such a way that I should get a state tax ID. I think the only thing I know for sure is that I need a good real estate accountant. If anyone knows any around Dallas, I'd appreciate the lead.
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You will get a Federal Identification number, that is all you need. You may have to file the TX franchise tax return. TX probably will issue a state ID for you.

Don't know any Dallas CPAs for you.

Joe.
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Thanks for any answers you guys might send my way.

-Dean

As you can see from this discussion there are many ways to set things up. I have a CPA firm in NY and we specialize in working with people in the real estate industry and we have a lot of new investors. If you would like to talk about your situation, feel free to email me or call me at any time with your questions and if we can help you we will

Stuart Mordfin CPA
Mordfin LLP
[email protected]
516-829-9088
www.mordfin.com

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