Help! Best entity to form for flips for tax liability

4 Replies

Hi, I'm a real estate broker/investor in Tucson, AZ and I have been flipping houses for several years now. I am just about to be a licensed broker up in Colorado and I will be doing flips up there also. As of right now I'm flipping houses with a family member who is also a broker but we are buying the houses in our own names and not our business and being taxed as sole proprietors. Following is my new plan to save on taxes. We will both form a new LLC in Colorado and buy our flip houses in my name or her name. We will then elect to be taxed as an S Corporation(We will be the only 2 members in our new Colorado LLC) and we will pay ourselves whatever we deem to be a reasonable salary(I've heard it should be at least half of our income) and pay our S Corp dividends so that we can save on self employment taxes. My questions are as follows: Do we have to elect to be taxed as an S Corporation by a certain time of the year? How long do we have in the year to decide how much to pay ourselves(reasonable salary). Do we have to pay ourselves the same salary or can we divide the salary unevenly depending on what is best for our individual tax situations and or how our work for the year was actually divided up? Also would it be a good idea to have our LLC be the owner of each newly aquired flip home that we purchase or should we be keeping the flip homes in one of our own names? Would there be any good reason to just form an S corporation or is it best to have an LLC taxed as an S corporation. To help me get these questions answered I am projecting a gross income of approximately $125,000 this year from flips. Any advise would be great. Thanks

Have you discussed this with your CPA?

You cannot form an S Corporation. You can however, form a Corporation and elect to be taxed as an S Corp, or an LLC and elect the LLC to be taxed as an S Corp. Remember, the S Corp is not a legal entity type. It is merely a Tax Election.

Generally the entity has 2 1/2 months after date of formation to elect to be taxed as an S Corp. Late elections are allowed, but discuss with your CPA.

I have discussed it with my CPA but I was still somewhat confused about the topic.  Thank you for clearing up the S Corp question.

@Jeffrey Hayes

Do we have to pay ourselves the same salary or can we divide the salary unevenly depending on what is best for our individual tax situations and or how our work for the year was actually divided up?

The S-corp should pay you and your fellow member a salary depending on the amount of work done. If you worked more than your fellow member - you should be paid more. However, it should be noted that the remaining income needs to be split based on ownership percentage.

Also would it be a good idea to have our LLC be the owner of each newly aquired flip home that we purchase or should we be keeping the flip homes in one of our own names?

You should look to acquiring the properties in the LLC/S-Corp. LLC/S-Corps provide you limited liability protection. A litigating attorney might be able to pierce the corporate veil if the entity is not within an LLC.

How long do we have in the year to decide how much to pay ourselves(reasonable salary)

You should look to paying yourself a salary throughout the year but atleast once during the year. paying yourself throughout the year does have increased administrative burdens(payroll returns, cut checks etc).

Would there be any good reason to just form an S corporation or is it best to have an LLC taxed as an S corporation.

LLC taxed as an S-corp might have less overall compliance burdens(meeting minutes, officers etc)

Do we have to elect to be taxed as an S Corporation by a certain time of the year?

Yes - within 2.5 months of tax year...however, there may be late filing relief if not timely filed.

$125,000 is a healthy amount of income to be earned in the flipping business and there should be some self-employment tax saving opportunities by forming an entity to be taxed as an S-corp

Basit Siddiqi, CPA
917-280-8544

@Basit Siddiqi,    Thanks so much for your great answers to my tax/entitity questions.  I really appreciate your time.  

 

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