Consider reading John Hyre’s how to article on selecting the right entity. I would setup two companies. An LLC to hold property you plan to own from 1 year or longer. Also, a Sub S to hold flips.
IRS, I understand, considers flipping a self employed business. (you stop working, the business does not continue on without you for the most part.)
Better get some help quick, you may owe 15.3% self imployment tax and have to put all the income at your personal rate, short term gains, for taxes - schedule C…etc.
Posted by Jay Fredricks on October 11, 2003 at 24:16:07:
I have been flipping vacant lots here in Northern Florida (jax area) for the last couple months - and have been just read the creonline article if you’re a Dealer/Investor.
My question is: Are all flippers in the dealer status? Is it possible to flip a lot and still be in the investor status?
Next question: What if I am flipping lots this year, and am in the dealer status. Next year, I do rentals which would be considered an investor status - Does the previous flipping now consider those rentals as a dealer transaction?
Well, the news is not good. There are articles about it in the How-To section as well as many threads in the archives. Search on “dealer”.
Now, here’s my take:
The rules are not clear by any means. You get tagged as a dealer after you flip a “certain amount” of properties. What is the the “certain amount”? Ever play “Pin the tail on the donkey”? You are considered a business and your houses are considered inventory. You don’t get to take any of the investor passive income breaks available to landlords.
I would think you could explain away one or maybe two flips as “getting lucky”. Then I’d seriously consider getting a corp to take the hit.
Now to question two, once the IRS decides you are a dealer, they will be watching you, and it’s very difficult to escape dealer status. Any houses you start claiming depreciation and cap gains treatment will be considered to be “inventory you couldn’t sell”.
Dealer status is alot like falling into a big hole. Once you fall in, it’s a bear to claw your way back out. Obviously they will not be eager to grant you a status that results in less revenue for them.