I am new to real estate investing, considering the fact that I have never actually completed a deal or actually got my, "feet wet." I know much information about rentals and setting up and LLC in regards to that specific area of real estate investing, but I have recently gained lots of interest in flipping homes. My question to everyone here on this forum is, can I flip properties and have rentals all within the same LLC?
Please know that I am aware of liability issues and different risks that I am taking by mixing the two areas of investing, but I literally just want to know if its legally possible to mix the two in the same business. If it is, do I need to make changes to an operating agreement that was originally set specifically on the area of rentals/leasing?
You would lose significant tax benefits by doing so but yes technically you could.
With that being said I would suggest you keep your rental properties in one LLC and then you flip houses through another LLC that is elected to be taxed as an S-Corp. Rentals and flips are taxed very differently.
Thank you for your feedback! If you don't mind taking time to answer a follow up question I have, I would greatly appreciate it.
If I already set up an LLC specifically for rentals/Leases, can I convert it into an LLC that is aimed towards flipping? Or would I have to create a new legal entity?
These are two different businesses and they will generate two different types in income In terms of how it is taxes. (Flips=active income subject to SE tax, Rentals = passive income non SE tax)
I would keep them separately for several reasons.
I would discuss with your attorney the Implications of re-using an existing LLC.
I do not advise on flipping and keeping rentals in the same LLC. These activities should be kept separately.
Furthermore, depending on your specific facts and circumstances, it may be beneficial to utilize an S Corp for your flipping activities.
I appreciate all of your feedback!
The reason I am asking this question is because I just filed yesterday to form my LLC through LegalZoom and I've already changed my mind on starting with rental properties and would like to start with flipping or rehabbing. The only problem at this moment is that when LegalZoom asked me what the main activities are that my business will be performing, I selected Rentals/Leasing properties to others. I am aware of electing to be treated as an S corp for taxation purposes, but now my question is, can my LLC legally flip houses if my business was created on the basis of investing through rentals/leases?
The reason that you do not want hold "Flip" and "buy and hold" real estate activities within the same LLC is that the IRS may consider you a dealer and treat all your sales(even those that you bought and held) as selling of inventory which is ordinary income and may be subject to self-employment tax.
You can change the activity of the LLC. If you have already drafted an operating agreement/LLC agreement mentioning the activities of the LLC; you may want to amend the document.
If you haven't done so - I think you should still be fine. However, you may want to reach out to an attorney to confirm.
Fabian, the answer to your question is yes. Your stated business purpose isn't legally binding. As others stated, once you get rolling and have a flip and a rental, don't do them in the same LLC. But for now you're just asking if you can use the LLC you set up recently for a different purpose than you designated at the time of formation. Of course.
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