Rental Property Investor · San Antonio, TX · Member since 2021 · 68 posts · 28 votes
My area is experiences huge amounts of very fast appreciation. So much so that the 1% rule and deep dive analysis for on market deals (even far below asking price) dont make sense to BRRR...but many of them do make sense to fix and flip.
I want to build capital to get into multifamily, my goal is income to have the option to quit my job.
Is there a tax structure that would allow me to fix, flip, and keep the profits in the business of which I just roll into the next property so I can avoid ordinary income tax?
My understanding of 1031 exchange is that its only relevant on rentals....not fix and flip.
Your best bet is to consult your CPA, getting tax advice from the general public on this site can lead to misinformation. As an example above, LLC's ARE pass through entities, however, they do NOT have "tax protections". Flipping income is treated as ordinary income and taxed at your marginal tax rate. You can not 1031 a flip if flipping was the initial intent.
I use an S Corp to flip however, you can also use an LLC with S Corp tax election to accomplish the same thing. The S corp provides some tax savings as some of the income can avoid self employment tax. When you flip, you have to pay the tax man, so if the intent is to use profits to buy and hold, then flip more for more profits (and more taxes) until you have enough for that buy and hold. Of course that is only one way of thousands.
LLCs are typically pass-through entities so have tax protection by themselves.
Flipping within an IRA is possible, but you cannot be actively engaged in the business or you risk blowing up your IRA. You would basically need to be a silent money partner in someone else's flips. Personally, I don't like investing in IRAs because of all the rules, and sometimes you end up paying more tax through the IRA than outside of one.
I prefer buy & hold real estate as the best shelter from taxes while also growing quickly. If you or your spouse can qualify for real estate professional status, it is possible to shield most or all of your income from income taxes.
Your best bet is to consult your CPA, getting tax advice from the general public on this site can lead to misinformation. As an example above, LLC's ARE pass through entities, however, they do NOT have "tax protections". Flipping income is treated as ordinary income and taxed at your marginal tax rate. You can not 1031 a flip if flipping was the initial intent.
I use an S Corp to flip however, you can also use an LLC with S Corp tax election to accomplish the same thing. The S corp provides some tax savings as some of the income can avoid self employment tax. When you flip, you have to pay the tax man, so if the intent is to use profits to buy and hold, then flip more for more profits (and more taxes) until you have enough for that buy and hold. Of course that is only one way of thousands.