Posted by ray@lcorn on October 17, 2005 at 14:22:41:
The dealer issue is determined by a pattern of action over time, based on the “intent” of the investor. Using multiple entities or adhering to some maximum number of sales (a myth BTW) does not change an intent to sell.
Corps are used for flips because the tax rate on a corporation is graduated, i.e. $0?$50,000 of taxable income is taxed at 15%, $50,001?$$75,000 = 25%, $75,001?$100,000 = 34%, and so on, the rate increases with taxable income. Right now that first level happens to be the same as the capital gains rate, which a dealer does not qualify for. And don’t have a coniption over the upper rates… the tax is computed as a blended rate, meaning taxable income of $100,000 would be taxed thusly:
$50,000 x 15% = $7,500
$25,000 x 25% = $6,250
$25,000 x 34% = $8,500
Total tax = $22,250, or 22% of the $100,000 TI. But heavens forbid any of us wind up paying that much in taxes. Corps also have advantages in income-splitting and certain perks, such as medical and insurance expenses for employees and shareholders, and page-long list of others.
That said, corps are not advised for holding properties that produce rent. There’s a bracket racket for corps that produce 60% or more of income from rent. The income is deemed as distributed to shareholders and the shareholders are deemed to be in the 40% tax bracket.
See Bronchick’s article question #8 at http://www.creonline.com/articles/art-226.html
Also, see John Hyre’s article at http://realestatetaxlaw.com/articles/dealing.php