Broker / Investor · Tewksbury, MA · Member since 2008 · 1k+ posts · 351 votes
Hi
I bought two properties this year and sold them for a profit. It is my understanding the profit from those flips will be treated as active income and subject to self employment tax. However I didn't even lift a finger to "flip" the property. All i did was buy the property and pay contractors for the work they did. All of my income this year was 1099 income from commissions except the two flips.
Are there any creative ways to avoid self employment tax on the flips by turning the profit from those flips into passive or portfolio income?
Consider establishing Solo 401k plan, which can allow you to shelter up to $55,000 of your income per year into a retirement account. You could double the amount you can shelter if you are married and get your wife involved in your business.
Consider establishing Solo 401k plan, which can allow you to shelter up to $55,000 of your income per year into a retirement account. You could double the amount you can shelter if you are married and get your wife involved in your business.
So with a solo 401 k we could flip properties within the solo 401 k? How does one set up the 401 k? I usually just do a roth IRA
Amazing that within so many answers only @Kate J. raised the critical question. You're a broker. How much is your net income from being a broker and other active businesses? If over $130k - then you should really stop worrying about the self-employment tax on the flips, as you would have maxed out on its biggest component: Soc Security.
Next, two minimal participation flips might (it's case by case) escape the self-employment tax if they qualify as short-term capital transactions rather than a bona fide flipping business. I'm not saying it will work in your case, but it is a possibility to look into.
1031 exchanges do not apply to flips.
C-corporations and retirement plans like 401k cut your access to the money, other than using it for future deals. You cannot spend this money to pay your bills.
Also, corporations, both S and C, create a lot of complexity that may or may not be worth the hassle.
Short story: a professional business needs a professional tax advisor.
Contractor · Atlanta, GA · Member since 2018 · 32 posts · 14 votes
7y
I've tried it multiple ways. That is more of an attorney question, but for me the extra corporate tax liability of a c-corp never proved beneficial when compared to a LLC as a simple pass-thru. It is beneficial to hold assets and not distribute them until a future date, which reduces your personal exposure, but it delays the inevitable exposure to double taxation unless you spend it wisely. I was fortunate enough years ago to meet an amazing attorney. I recommend you do the same. A couple hours of time spent on an attorney should get all your questions answered appropriately.
Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes
7y
@Rich Hupper "I have a question. Big businesses that are traded on the NYSE etc, are those all c corps?
When they go apply for loans do banks need personal guarantees from certain members of the companies board?f"
I seriously doubt directors on the boards of publicly traded companies are signing personal guarantees on company debt. Big companies generally issue bonds and don't go the 'traditional financing' route that main street does. I'm no expert in corporate finance however....
These are established companies that have a credit rating and a track record. If you want to avoid a personal guarantee with your LLC or corporation you need to either have a credit history with the company, enough assets to provide collateral and security for the loan, or a good relationship with the creditor. Maybe some combination of all three. The last is perhaps the most important.
To answer your original question, you can convert to an S-Corp and possibly backdate the effective date to avoid SE tax.
To save even more on tax you can employ other strategies such has hiring kids, augusta loophole, revenue stream separation, section 105 medical expenses reimbursement, etc....
Consider establishing Solo 401k plan, which can allow you to shelter up to $55,000 of your income per year into a retirement account. You could double the amount you can shelter if you are married and get your wife involved in your business.
So with a solo 401 k we could flip properties within the solo 401 k? How does one set up the 401 k? I usually just do a roth IRA
Susan, retirement accounts (including Solo 401k) are designed to be invested passively. If you start running an active business (flipping might be considered an active business depending on the number and frequency of flips as well as other investment activity of your 401k) in your 401k it will owe Unrelated Business Income Tax. So the answer is: you could, but it may not be worth it, ideally you'd want to invest your retirement funds passively.
To answer your original question, you can convert to an S-Corp and possibly backdate the effective date to avoid SE tax.
To save even more on tax you can employ other strategies such has hiring kids, augusta loophole, revenue stream separation, section 105 medical expenses reimbursement, etc....
@Jim Thomas Yes that is the next step finding the right attorney to help me set up the business properly.
The biggest thing that confuses me is how to make your entity credit worthy enough you personally do not need to guarantee loans.
If all the entity structures are pass throughs the entity never has any collateral.
I too would like to figure out how to build up credit worth in LLC an S corps because every property i jtry to buy outside my own name or personal guarantee they reuire that. also they never give me a non recourse loan even on 12 units with cashflow...
Contractor · Atlanta, GA · Member since 2018 · 32 posts · 14 votes
7y
The only way to accomplish a loan that does not require a personal guarantee would be for an entity to have enough liquid assets to cover the liability. Beware of a lender that is advertising "non-recourse".
The only way to accomplish a loan that does not require a personal guarantee would be for an entity to have enough liquid assets to cover the liability. Beware of a lender that is advertising "non-recourse".
I thought one of the points of getting into multifamilies like over 18 units would be that the bank looks more at the property's performanc, the NOI and cap instead of looking at the personal guarantee of the partners who own the entity (llc)