To the extent that you receive a price (after you sold your note to yourself) in excess of your cost basis, you would pay tax as a dealer, which as you know includes self-employment tax, if you are structured as a limited partnership.
If you sell your note to one of the institutional note buyers, that obviously will trigger tax (assuming you made a profit).
So the case we are left with is the one you cite…where you do ALL the financing yourself, and do a deal with yourself (called self-dealing), and sell the note to yourself as another entity. Even if you’re doing this type of deal, it still would be best to have it take place initially in a C Corp.
But despite your persistence with this idea, I hope you’ll let me know when and if this strategy is ever audited…I’d love to hear the results when and if the IRS delves into the issue of self-dealing.
By the way, John Hyre had a recent post on this score where he suggests that you don’t have to go through all this paper shuffling to accomplish what you’re attempting to accomplish. In fact, if I recollect he specifically warned against self-dealing in that particular thread.
I have been sold all along on setting up an S-corp as my protection for the REI I want to do. If I recall correctly, Bill Bronchick himself told me at the convention that that is what I need for what I want to do. I primarily would like to focus on L/O’s, subject to’s/foreclosures, and maybe some low end flips. This is how I understand the different entities:
LLC- Primarily Buy and Hold Strategy; not good for flips or L/O because of dealer status with IRS; taxed as a sole proprietor ie taxation passes through to personal taxes. I have also heard that if you do L/O’s in a LLC, set up a separate LLC for each property. Or am I confusing that with setting up a separate ILC for each property and put them all under a LLC?
C-Corp- Good all around lawsuit protection; income splitting; double taxation; corp is a separate entity which has to file it’s own taxes; excellent for fringe benefits; good for flips, L/O and subject to, dealer status not a consideration; audit unlikely under $100k.
S-Corp- Good all around lawsuit protection; taxed as sole proprietor ie taxation passes though to personal taxes; corp files information only federal return; fringe benefits are only available to shareholders who hold less than 2% ownership; good for flips, L/O and subject to, dealer status not a consideration; audit unlikely under $100k.
I am going to set this entity up this week so that I can get going! I am ready with paperwork from Bronchick’s course to go in either direction. I think I have pretty much ruled out a LLC, but let me know I if I should reconsider. What are those of you that are already investing in the areas that I want to focus on using to protecting yourselves? What good or bad points have I missed? How have your entities worked out for you?
I have been reading so much on the internet about the different ins and outs, plusses and minuses that I am reluctant to make a decision. Please offer any advice you can!
I’ve been struggling with the same thing. Doesn’t seem to be a clear answer as to what the top dogs recommend as an entity for a few flips a year and L/O’s.
For the life of me, I’ve read Bronchick’s articles on the subject a number of times but still am not clear on what is best protection.
Let me know what you decide. I’d be most interested.
Also check out the free articles and books(not free) on this area at www.nolo.com. Bronchick has some free articles at CREOnline on corporate structuring that may be helpful to you.
I use C Corp for what you’re talking about. Whether an S Corp carries some particular advantage to you personally, I can’t say. I’m no expert on the in’s and out’s of S Corps.
Frankly, if I were going to do an S Corp, I would probably rather do an LLC, and elect corporate taxation. I think the lawsuit protection from an LLC beats the S Corp.
Posted by Lori Samson on May 30, 2000 at 13:06:09:
We do mostly options and some of what you described you are interested in. We have a C-corp and an LP with the corporation the general partner. It saves as a ton in taxes and we are paid out of the LP not the C-corp becuase we would have to pay all the matching withholding etc. ech! Bill has advised us and also Bryan Dunklin from Dallas. But the person who helped us most was George Yeager (I think that was his name-it seems to slip my memory at the monent) from the Houston area. I know he is expensive and he consulted with our CPA to get us set up right. He is one who does the Zero Tax boot camp of Ron LeGrand’s (I’ve heard). Ask me why we are set up that way in detail…I can’t tell you all the reasons because I don’t enjoy the learning curve when it comes to ‘Bullet Proofing our Corporation.’(one of Bronchich’s courses that I struggled with and handed over to my husband to figure out.) Lori