Business and tax structure for rehabs

3 Replies

Hello all,
Great forum here. I had a question for which I wanted all the experts' opinions...
For tax purposes (lowest tax possible), what is the best business structure (LLC, Corp, etc) for a rehabbing business? I am ready to set up my business and would like to get some opinions on which structure works best.
Also since it's a slow market where I live, I will also be offering my completed rehabs (that don't sell in a predetermined period) as lease purchase (rent-to-own), or outright hold as rental properties. I will be buying all cash, so holding costs are not such a pressing issue here.
I look forward to reading your replies.
Thanks in advance and prosperous investing to y'all.

Welcome aboard; I'm glad to finally see another investor who "gets it" as far as paying cash!

I've always just purchased everything in my own name, with a $3MM umbrella policy in place. How you hold isn't going to impact your taxes (generally) and may make your tax filing more complex, and seller financing is going to make it complex enough.

If I were starting out now I "might" set up LLCs and use one LLC for every 3 properties, but I might just do it the way I've always done it.

Good luck and welcome aboard.

Depending on your state law you may find that outright sales, with low down and easy qualifying, are easier to do than L/Ps.

all cash

:beer: Thanks for the reply. I think I am going to flip my first house without forming any sort of business entity. I will get that umbrella policy though. Anyone else want to chime in?
To comment on the last part of the last post. Ideally, I would like to outright sell the property since I would recover all the cash and I can move on to my next deal, but the market is somewhat slow here. So, the lease purchase is a good option because: You get option $, you get rent $ and you get to sell the property at a pre-determined price (in the future). Now, if the option expires without the renter excercising it, well, you do it all again...Option $, renegotiated rent and renegotiated purchase price. The only caveat is that the $ will be tied until the renter excercises the option to buy. Well, this is a whole different topic, so I'll stop here.
Let me know what y'all think eh?

You should have an S-corp for the rehabs that you flip. You will save 15.2% on SE tax. If you hold properties for rent, then you can have an LLC for those properties. If you hold the props for rent, then you can depreciate the property and have losses pass thru to the partners of an LLC. You would be able to distribute cash out to partners without triggering any tax. If you have an s-corp, then you want to have this company doing the ordinary work, like buying, rehabbing and selling houses & inventory. Since you buy the homes to fix up and sell, then they will be inventory and you can not depreciate them.

A little tax planning or strategy could be the following:

Set up an LLC, buy up properties, fix them up and rent them for a while. You will get to depreciate the property and then sell the property later for a capital gain. That saves another 15%, depending on your tax rate.

There's a lot more too, so constant discussions for your situations are necessary.