LLC vs C Corp vs S Corp: Tax Issues

[BENJAMIN KELLY]

Real Estate is a part time business for me.  My plan is to rehab and flip 4-5 homes per year.  I have a full time job as an insurance agent where I am a partner in an S Corp.  My paycheck puts me in the 30% tax bracket.  

Currently I am investing my properties in a sole member LLC where the income is passed directly through to my 1040 (taxed at 30%). If I sell a property with 120 days, I am then taxed at my effective tax rate of 30%. In my opinion, this is harsh.

I have heard or done research that a C Corp may be better for me to invest my rehabs in.  The effective tax rate (capital gain) would be at 15%, I would plan on taking W2 income as an employee. 

My problem is that I am trying to reduce my overall personal tax rate, limit the amount of information a lender may have with obtaining a loan or line of credit, and reducing my liability exposure when it comes to protecting my personal assets.  I realize I am going to have to pay the tax, I am just trying to figure out a better way to do.

Any help would be appreciated as my counsel and CPA are trying to work together to find the ultimate solution.

Thank you

[Dave Toelkes]

Originally posted by @BENJAMIN KELLY:

Currently I am investing my properties in a sole member LLC where the income is passed directly through to my 1040 (taxed at 30%). If I sell a property with 120 days, I am then taxed at my effective tax rate of 30%. In my opinion, this is harsh.

Just to add to what John has already said.

Property flipping in your single member LLC is reported on Schedule C (not Schedule D) and your flip income is taxed as self-employment income. This means that your flip income is subject to payroll taxes in addition to your ordinary business income tax. Just to reinforce what John already said, flip income is not capital gain income, but rather, ordinary business income, There is nothing magical about 120 days. Flip income is ordinary business income subject to self-employment income taxes no matter how long it takes to complete the flip, even if it is longer than one year.