Flips owned via Land Trust in a separate LLC from rentals?

Question

Hello all, should you keep flips separate from an LLC that holds rentals?  If so, why? Other than asset protection.

Is the income taxed differently?  I typically like to take title via Land trusts and have the beneficial interest go to the LLC ...is it better to have the beneficial interest go to individual instead of my LLC that holds the rentals?

Ashish Acharya · Answer

@Chris Howard ,

If You ignore asset protection,  one LLC can have both Flips and hold rentals.

1) yes, the types of incomes generated via both activities are different. Flips are ordinary income and Rentals are passive income. But, even though they are under same LLC, they will be reported under different schedule or part of the return, so it's not a big deal from the tax preparation perspective. Meaning, it is not forbidden.

2) You already know why we recommend separating flips and rentals for asset protection. In future, there might be some complication if you conduct both activities under same LLC. As you do more flips, you will want to elect your LLC to be taxed as S-corp to save on SE tax of almost 15% on your profit.

But, as you know, we do not want rentals under S-corp for a number of reasons. So, there is one disadvantage besides asset protection.

For the beneficial interest of the Trust, I dont think it matters to whom it goes:. LLC or individual. Even if you have an LLC as beneficiary, LLC will eventually flow the activity to an individual.

Maybe a lawyer can chime in.

Costin I. · Answer

Not a lawyer, nor CPA, so take this with due diligence:

1. Land trust gives you anonymity and complements the LLC, which gives you asset protection. For sure, you don't want to move the beneficiary to the individual - all you'll get is the loss of asset protection.

2. An LLC is a pass-through entity for taxation purposes. You can choose to have it taxed as a S-corp, but you don't want to own properties in an S-corp (Owning Rentals in an S Corporation Might Be a Costly Mistake).

3. While you can probably do it, you'll mix passive income with active income. And for sure it will complicate your bookkeeping and accounting.  And of course, the taxes.

4. You want your asset holding entity to be just that - only hold the asset. You should have a separate operations entity - that will do all the public interfacing, property management, hiring of contractors, leasing, etc. This one can be a C-corp so you can have a salary, establish health plans and retirement accounts (e.g. Solo 401K- the best options of self direct investment retirement accounts).

5. And you'll want a separate LLC for flipping, maybe even a separate one for each flip (if a Series-LLC is not available to you). That way, if a buyer comes back with a complaint about a flip you sold them years ago, it will not put to risk your other flips or the assets holding.

6. Consult with a specialist (watch Podcast 109 and talk with @Scott Smith) - you might be able to combine the operations LLC with the flipping LLC into one, but is likely to be better if you have an LLC just holding your flipped properties. Not sure on this one, talk with Scott.

So, in short, you want them separate for accounting, taxes, and asset protection purposes.

Michael Plaks · Answer

@Chris Howard

1. Yes, the income is taxed differently. While it is possible to have all moneys in one company and split it into two buckets for tax preparation - it's much easier to do when they are already naturally separated between two LLCs.

2. Besides simplicity and clean separation, the flipping entity might decide to choose a different form of taxation (S-corporation). You do not want to hold rentals inside an S-corp however.

3. You will be able to bring in a partner for a flip while keeping all rentals to yourself - or the other way around, Or different partners for different projects.

4. The new tax law created a so-called 20% deduction on "qualified business income." Unfortunately, we do not yet have enough clarity on how it will be implemented, but it is quite possible that separating flips and rentals will help you maximize this new deduction.

5. Separation can sometimes simplify borrowing money, depending on the type of funding you're using.

6. Legal liability should be discussed with an attorney, which I'm not. But generally, the more things are separated, the better for legal protection, as far as I understand.

7. Last but not least. We accountants will be able to charge you for one additional tax return. :)

PS. Agree with @Costin I. that assigning the beneficial interest to yourself eliminates liability protection provided by LLC. But our opinions are pretty much worthless, since we're not attorneys.

Flips owned via Land Trust in a separate LLC from rentals?

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