Do I separate LLC for both my flipping & rental buisness?

Flipper/Rehabber · Kansas City, MO · Member since 2015 · 24 posts · 2 votes

I have been flipping houses for 3 years now under my LLC, but was wondering if I should start a new LLC specifically for my rental properties. How does everyone else structure their flips and rentals?

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David Krulac

Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes

10y

wouldn't hurt to separate DEALER property like the flips from the INVESTOR buy and holds for IRS audit purposes. The difference could be between 43% Federal tax and 20% Federal tax (capital gains).

Dealers can not take capital gains!

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David Krulac
Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
10y
wouldn't hurt to separate DEALER property like the flips from the INVESTOR buy and holds for IRS audit purposes. The difference could be between 43% Federal tax and 20% Federal tax (capital gains).
Dealers can not take capital gains!
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Kenneth LaVoie
Rental Property Investor · Winslow, ME · Member since 2008 · 826 posts · 281 votes
10y
One thought: I've heard it can be advantageous to use an SCORP for flips because the gains are often "short term" (vs long) and taxed at same rate as ordinary income. You are then responsible for fed, state but also FICA and SS. With an SCORP, you can "dictate" how much salary you get, so that only a portion of your profits are subject to FICA and SS. Make sense? That being said, I'd say it's probably a good idea to separate due to the different nature of the two businesses, that way it can be easier later if you do want to switch the flipping side of things to an SCORP.
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Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
10y
I'll suggest a Missouri Series LLC with two cells, one for holding and one for general RE activities, they are basically considered separate entities that are a subsidiary of the main LLC. Don't commingle funds between cells except as to transfer ending balances to the capital account. In other words don't pay (account for) for lumber from your fix and flip books for rental repairs, that is an internal accounting matter, but you can have one disbursement from a general operating account......understand? Talk to your accountant. :)
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David Krulac
Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
10y
@Kenneth LaVoie
even flipping where the deal last more than 1 year are essentially short term capital gains taxed at the ordinary rates up to 43% Federal, because they are flips and ALL flips are dealer property and ineligible for long term capital gains treatments.
BTW dealers are also ineligible for:
1. Long Term capital gains treatments
2. Installment sales treatment of seller financing
3. Section 1031 Tax Free exchanges
4. Depreciation
2 Reply
Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
10y
Definitely separate business purposes. I don't do entities for my little houses that I get financing on, but I certainly wouldn't lump them in with my flippin LLC. lol
What a nightmare that would be to separate out. Passive activity of B&H is very different than just about any type of active enterprise.
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Chris DawsonPro Member
Real Estate Broker / General Contractor / Property Manager · Kansas City, MO · Member since 2010 · 395 posts · 425 votes
10y
@Chris Sickler it is always best to split out your businesses into separate LLCs for the reasons already mentioned above and just as importantly for liability purposes. If you get sued by a tenant, you don't want them to lump your flip business into their lawsuit. I have clients that use a different business for every type of investing that they do, such as SFRs, multi family, commercial and flips. In general, if you are working with a different set of clients/tenants/buyers you should be using a different LLC. For the same reasons, my company, Arrow Realty Network, has separate LLCs for each division (residential real estate sales, commercial sales, property management, construction, and redevelopment).
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Chris Sickler
OP
Flipper/Rehabber · Kansas City, MO · Member since 2015 · 24 posts · 2 votes
10y
Thanks to everyone who contributed to answering my question. I think I know what I need to do now. Very informative!!
1 Reply
Terry Kerr
Investor · Arbela, MO · Member since 2015 · 24 posts · 9 votes
10y
@Bill Gulley How long Has Missouri had series LLC's? We use them in Iowa but was told Missouri didn't have them. How many different series can you have in One LLC?
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Jerry W.Pro Member
Moderator
Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
10y
@Chris Sickler, you got some good advice on doing a Subchapter S Corp for flipping. Talk to your tax accountant about it.
1 Reply
Steven Hamilton IIPro Member
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
10y
Originally posted by @Chris Sickler:

I have been flipping houses for 3 years now under my LLC, but was wondering if I should start a new LLC specifically for my rental properties. How does everyone else structure their flips and rentals?
That is definitely something to consider. You will however, want to talk in depth with an accountant. Being you are using an S-corp for flipping you DO NOT want to use that entity to hold your rentals. Never ever hold real estate long term in anything taxed as a corporation.
@Bill Gulley is right in the Series LLC option.
[email protected]224-381-2660
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Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
10y
@Terry Kerr
Let me say recently, past few years as I don't know when the Series was adopted. It is listed on the Mo. Sec. of State's web site.
You can have a Sub-S corp as a member in the Series LLC with its own cell, as mentioned.
You can have as many cells as you can describe! There is no limit!
You need to describe each cell at the time you register to avoid adding future cells at an addition cost.
While the Series hasn't been tested so much in court, care should be taken in keeping activities separate between each cell. Each cell has its own books, not a big deal really thanks to tech savvy bookkeepers. Missouri is pretty corporate friendly and the regular LLCs have been tested and with favorable findings for owners, I really think Mo. courts would hold up the Series just as well, just run the business according to the rules.
There is no annual report required, just taxes. I'll probably be opening a Series myself, seems they would be pretty simple to manage. Good luck :)
2 Reply
Terry Kerr
Investor · Arbela, MO · Member since 2015 · 24 posts · 9 votes
10y
@Bill GulleyThanks for the information. Our plan is to contact an attorney next week to set up our business in Missouri and knowing what others are doing before calling helps us ask the right questions.
1 Reply
Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
10y
Originally posted by @Terry Kerr:

@Bill GulleyThanks for the information. Our plan is to contact an attorney next week to set up our business in Missouri and knowing what others are doing before calling helps us ask the right questions.
Great! A good corporate/business attorney is what to look for, it's the Operating Agreement in LLCs that really matter! A monkey can file an LLC and fill in the blanks, that is something you could save money on, then using the attorney for the heavy lifting. The initial question is manage managed or member managed, there are articles on the Sec of State website that address the differences. Good luck :)
1 Reply
Terry Kerr
Investor · Arbela, MO · Member since 2015 · 24 posts · 9 votes
10y
@Bill Gulley thanks I will check that out today. More great information.
1 Reply
Mike H.
Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
10y
Let me ask this though.
Isn't there an advantage in putting it under an S corp in terms of how much of the profits you'd have to pay self employment taxes on?
I was a corp to corp contractor for a bit (IT). And here is how I set that up. My consulting company paid my corporation a set fee for my work (lets say 10k a month). I then I had my corporation pay me a salary of 7k a month - of which I paid all the crazy SE taxes for.
But that other 3k a month was deemed to be the corporation's profits. At the end of the year, I took that money as a draw/disbursement and only paid regular income tax on it.
So does an LLC allow for the same thing? If not, would a flipper not be better off creating an S Corp so that the corporation entity (which pays no self employment taxes on its profits) allows for some of the profits to be shielded from the full brunt of the SE tax hit?
i.e. Lets say you flip a property for 20k profit. The S corp pays you 10k as a salary. You have to pay the SE taxes on that 10k. But then the other 10k is the profit for the corporation that you take out at the end of the year or the quarter as a disbursement/draw. And that then shows up on your personal tax return as regular income subject to regular taxes but not the much higher SE taxes?
2 Reply
Chris Sickler
OP
Flipper/Rehabber · Kansas City, MO · Member since 2015 · 24 posts · 2 votes
10y
Can't tell you all how helpful this has been. Now I can sound smart when I call my accountant!!
1 Reply
Logan AllecBusiness Member
Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
10y
@Mike H., you're very correct that an S corp would be preferable to an LLC for flipping. I've done the math many times for clients, and someone with a non-real estate day job of $100,000 and flipping income of $100,000 who pays him- or herself an annual salary of $60,000* from the S corp would save $4,200 in self-employment taxes by doing his or her flips in an S corp rather than an LLC. This takes into account the FICA taxes paid by both the S corp and the S corp owner on the S corp salary.

*While there is no hard-and-fast rule as to what constitutes a "reasonable salary", this 60/40 salary/distribution split is considered conservative (that is, erring on the side of caution) among tax professionals. If you wanted to get a bit aggressive and do a 50/50 split, the savings would be $5,500; 40/60, $6,800.
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Shane H.
Investor · Wichita, KS · Member since 2015 · 769 posts · 279 votes
10y
Glad I came across this thread and as always I realize this is not legal advice, merely opinions - seek out advice from your own professionals etc.
@Logan Allec
I'm getting ready to purchase a flip or a buy n hold - however do not have a "flip" LLC set up -- I have one for property management, and one for my each of the two properties I presently own. My line of credit and credit facility I'll be using/have set up is in the name of one of the buynhold LLC's --
So as far as I know I'm going to be "stuck" titling the new acquisition in the buynhold LLC as the bank will be lending to that entity.
I'm very good at keeping records and separating out receipts as to what expenses go to what - so would it be a bad idea if I come across a flip to proceed purchasing it/selling it under the buy n hold LLC?
I have enough writeoffs I get my effective tax rate very low, however for example sake lets say if I make a profit of $25k from a flip that would certainly change things.
If I'm following this topic correctly - if I have a day W2 job (which I do presently) and that is my primary source of income -- If I complete a flip through my LLC - I'll have to pay SS(Fica Tax) on the profit/increase in my ordinary income per the K1? I was thinking I'd only have to pay the appropriate state/federal income taxes. Am I confused or on the right path?
I can see why it would be important to set up a separate entity to run flips under - however I do not see that as being a major part of my business and would only do so if the right opportunity arose. I presently do not have enough properties for it to be an issue to keep expenses separate. However when growing in volume it could certainly be an issue a few years down the road.
Good topic/thread, and great responses.
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Steven Hamilton IIPro Member
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
10y
Originally posted by @Mike H.:

Let me ask this though.
Isn't there an advantage in putting it under an S corp in terms of how much of the profits you'd have to pay self employment taxes on?
I was a corp to corp contractor for a bit (IT). And here is how I set that up. My consulting company paid my corporation a set fee for my work (lets say 10k a month). I then I had my corporation pay me a salary of 7k a month - of which I paid all the crazy SE taxes for.
But that other 3k a month was deemed to be the corporation's profits. At the end of the year, I took that money as a draw/disbursement and only paid regular income tax on it.
So does an LLC allow for the same thing? If not, would a flipper not be better off creating an S Corp so that the corporation entity (which pays no self employment taxes on its profits) allows for some of the profits to be shielded from the full brunt of the SE tax hit?
i.e. Lets say you flip a property for 20k profit. The S corp pays you 10k as a salary. You have to pay the SE taxes on that 10k. But then the other 10k is the profit for the corporation that you take out at the end of the year or the quarter as a disbursement/draw. And that then shows up on your personal tax return as regular income subject to regular taxes but not the much higher SE taxes?
Mike,
For IRS purposes an LLC does not exist until you make a tax election.
Very similar if that LLC is taxed as a S-corp.
Here is a thread on the taxation of LLCs
[email protected]224-381-2660
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Steven Hamilton IIPro Member
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
10y
Originally posted by @Shane H.:

Glad I came across this thread and as always I realize this is not legal advice, merely opinions - seek out advice from your own professionals etc.
@Logan Allec
I'm getting ready to purchase a flip or a buy n hold - however do not have a "flip" LLC set up -- I have one for property management, and one for my each of the two properties I presently own. My line of credit and credit facility I'll be using/have set up is in the name of one of the buynhold LLC's --
So as far as I know I'm going to be "stuck" titling the new acquisition in the buynhold LLC as the bank will be lending to that entity.
I'm very good at keeping records and separating out receipts as to what expenses go to what - so would it be a bad idea if I come across a flip to proceed purchasing it/selling it under the buy n hold LLC?
I have enough writeoffs I get my effective tax rate very low, however for example sake lets say if I make a profit of $25k from a flip that would certainly change things.
If I'm following this topic correctly - if I have a day W2 job (which I do presently) and that is my primary source of income -- If I complete a flip through my LLC - I'll have to pay SS(Fica Tax) on the profit/increase in my ordinary income per the K1? I was thinking I'd only have to pay the appropriate state/federal income taxes. Am I confused or on the right path?
I can see why it would be important to set up a separate entity to run flips under - however I do not see that as being a major part of my business and would only do so if the right opportunity arose. I presently do not have enough properties for it to be an issue to keep expenses separate. However when growing in volume it could certainly be an issue a few years down the road.
Good topic/thread, and great responses.
DO NOT combine the two types of income. You could put yourself in a situation where the IRS may treat the sale of a rental as though it was inventory from your flips.
That would be if your LLC is taxed as a partnership.
Your flip business can pay you a salary and benefits if it is taxed as an S-corp or C-corp.
NEVER EVER hold real estate long term in an entity taxed as a corporation.
You DEFINITELY need to sit down and pay a real estate savvy accountant for advice.
-Steven the Tax Guy
[email protected]224-381-2660
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Scott W.
Real Estate Investor · chicago, IL · Member since 2012 · 1k+ posts · 231 votes
10y
Originally posted by @Steven Hamilton II:

Originally posted by @Mike H.:
Let me ask this though.
Isn't there an advantage in putting it under an S corp in terms of how much of the profits you'd have to pay self employment taxes on?
I was a corp to corp contractor for a bit (IT). And here is how I set that up. My consulting company paid my corporation a set fee for my work (lets say 10k a month). I then I had my corporation pay me a salary of 7k a month - of which I paid all the crazy SE taxes for.
But that other 3k a month was deemed to be the corporation's profits. At the end of the year, I took that money as a draw/disbursement and only paid regular income tax on it.
So does an LLC allow for the same thing? If not, would a flipper not be better off creating an S Corp so that the corporation entity (which pays no self employment taxes on its profits) allows for some of the profits to be shielded from the full brunt of the SE tax hit?
i.e. Lets say you flip a property for 20k profit. The S corp pays you 10k as a salary. You have to pay the SE taxes on that 10k. But then the other 10k is the profit for the corporation that you take out at the end of the year or the quarter as a disbursement/draw. And that then shows up on your personal tax return as regular income subject to regular taxes but not the much higher SE taxes?
Mike,
For IRS purposes an LLC does not exist until you make a tax election.
Very similar if that LLC is taxed as a S-corp.
Here is a thread on the taxation of LLCs
for whatever reason, whenever I read the tax guy's responses, I get even more confused. I think his wording is just too "tax" complicated & can't bring it down to my level. :)
sounds like a smart guy though!
0 Reply
Steven Hamilton IIPro Member
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
10y
Originally posted by @Scott W.:

Originally posted by @Steven Hamilton II:
Originally posted by @Mike H.:

i.e. Lets say you flip a property for 20k profit. The S corp pays you 10k as a salary. You have to pay the SE taxes on that 10k. But then the other 10k is the profit for the corporation that you take out at the end of the year or the quarter as a disbursement/draw. And that then shows up on your personal tax return as regular income subject to regular taxes but not the much higher SE taxes?
Mike,
For IRS purposes an LLC does not exist until you make a tax election.
Very similar if that LLC is taxed as a S-corp.
Here is a thread on the taxation of LLCs
for whatever reason, whenever I read the tax guy's responses, I get even more confused. I think his wording is just too "tax" complicated & can't bring it down to my level. :)
sounds like a smart guy though!
The biggest problem is it is such a complicated topic we are working with. There are many caveats and exceptions to rules. That thread on taxation breaks it down fairly simply. I'm giving a presentation on Tuesday about similar topics.
[email protected]224-381-2660
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Christopher Winkler
Specialist · Dallas, TX · Member since 2014 · 900 posts · 392 votes
8y
Originally posted by @David Krulac:

@Kenneth LaVoie
even flipping where the deal last more than 1 year are essentially short term capital gains taxed at the ordinary rates up to 43% Federal, because they are flips and ALL flips are dealer property and ineligible for long term capital gains treatments.
BTW dealers are also ineligible for:
1. Long Term capital gains treatments
2. Installment sales treatment of seller financing
3. Section 1031 Tax Free exchanges
4. Depreciation
Hi @Kenneth LaVoie, do you cover more info on the subject of what a "Dealer" in your podcast?
0 Reply
Kenneth LaVoie
Rental Property Investor · Winslow, ME · Member since 2008 · 826 posts · 281 votes
8y
@Christopher Winkler - I'm sorry you have me at a disadvantage. I've never created a podcast.
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