Tax Organization Structure

3 Replies

Where are my blind spots in this tax organization for a real estate developer. A single member LLC (Company X) runs rentals, RE development, and is General Contractor on the development of the properties. The rentals need to move out of this LLC.

Now the Development projects are LLCs taxed as partnerships with the main LLC as the general partner.

1. Is there any way around dealer status for RE Development for this kind of operation (buy land, develop houses, sell to individuals)?

2. Company X is thinking of changing to a Corporation. This would eliminate the dealer status and only leave the taxation of corporations, correct?

3. The partners of the development would need to find their own ways of avoiding dealer status or are they protected since they are limited partners?

Originally posted by @Pat Williams :

Where are my blind spots in this tax organization for a real estate developer. A single member LLC (Company X) runs rentals, RE development, and is General Contractor on the development of the properties. The rentals need to move out of this LLC.

Now the Development projects are LLCs taxed as partnerships with the main LLC as the general partner.

1. Is there any way around dealer status for RE Development for this kind of operation (buy land, develop houses, sell to individuals)?

2. Company X is thinking of changing to a Corporation. This would eliminate the dealer status and only leave the taxation of corporations, correct?

3. The partners of the development would need to find their own ways of avoiding dealer status or are they protected since they are limited partners?

Is "main" LLC your SMLLC?

1) If you hold the land for more than a year, yes there might be planning available to treat some of the gain as capital gain to avoid the Self employment taxes and get lower favorable rate. 

2) Yes, the the Corp will pay the taxes but changing to Corp has down sides. You will be double taxed on the money you are going to take out of the Corp. S-Corp would be the best. Just changing the entity will not help you with avoiding the dealer status. Also there is no favorable capital gain tax at the Corp level, so avoiding the dealer status with C Corp doesn’t makes sense. There are other benefits of C-Corp but needs to be discussed in detail. 

3) Being limited partners will not avoid the dealer ordinary income. They might avoid the SE taxes depending on their involvement. 

Thank you. That is very helpful. That is correct, the "main" LLC is the SMLLC.

1. There are strategies to segregate the land held long-term/as an investment and the development as ordinary income, correct?

2. The mere changing of the entity does not avoid the dealer status? I would have thought that all activity would then be classified as ordinary once the entity is a corporation and there would be no distinction between capital gains/investing and ordinary income/development. So C/S-corp simply does not take away the dealer status?

3. The investors of the project are currently LLC members taxed as a partnership. As currently constructed without precautions for dealer status, all income is probably ordinary income. Is there a way to protect the investors of the development project? Or if you invest in a RE development venture, you will also be subject to the dealer status as well? Could this be mitigated by the investors creating a corporation, depending on their tax bracket?

Thank you.  That is correct, the "main" LLC is the SMLLC.

1. There are strategies to segregate the land held long-term/as an investment and the development as ordinary income, correct?

2. The mere changing of the entity does not avoid the dealer status?  I would have thought that all activity would then be classified as ordinary once the entity is a corporation and there would be no distinction between capital gains/investing and ordinary income/development.  

3. The investors of the project are currently LLC members taxed as a partnership.

@Pat Williams

I agree with what @Ashish Acharya said. His comments are on point but are obviously generic. With your business plan, you really need a custom tax plan addressing your specific financial situation, the specific projects you're pursuing, involvement of other people, your short-term and long-term goals etc. 

Trying to structure a complex business from online tips, even tips coming from CPAs, is shortsighted, IMHO. Get yourself a tax strategist - a CPA, an EA, a financial planner or a similar professional specializing in real estate.