LLC vs Individual - Posted by Berno

import · October 10, 2005, 10:37am

Posted by ray@lcorn on October 17, 2005 at 14:22:41:

Michela,

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.

For more:

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

ray

import · October 10, 2005, 10:37am

LLC vs Individual - Posted by Berno

Posted by Berno on October 10, 2005 at 10:37:22:

I own several investment properties as an individual, and I was thinging of starting an LLC. Could anyone tell me the tax advantages/disadvantages of transferring my properties to an LLC and buying, selling and renting from the LLC? For example, If I purchased a $100,000 property, fixed it with about $25,000 and then sold it a few months later for $200,000, what would the taxes be as an individual vs and LLC? (I know there are variables, just wondered if someone could give me the jist). Thanks!

import · October 17, 2005, 5:39pm

Re: LLC vs Individual - Posted by Commercial Investor

Posted by Commercial Investor on October 17, 2005 at 17:39:40:

One of the primary reasons for holding property in an LLC instead of as an individual is for liability reasons. In the LLC, your losses will be limited to the assets of the LLC and not your other personal assets in the event of a lawsuit. However, if there is willful misconduct, a judge may open you up to other penalties outside the LLC which could affect your other personal assets. Nonetheless, it can be helpful to have your properties in the LLC to alleviate liability and separate your real estate business finances.

import · October 12, 2005, 12:47pm

Re: LLC vs Individual - Posted by ray@lcorn

Posted by ray@lcorn on October 12, 2005 at 12:47:30:

Berno,

An LLC is a “pass-through” entity for tax purposes. That means the income or loss of the LLC passes straight through to the members (owners). So in your scenario above, the simple answer is that there would be no difference in the taxes. Since the gain is realized in less than one year, it would be classed as ordinary income and taxed at whatever rate the individual qualifies for.

Generally, LLCs are used for long-term hold properties, and short-term flips are done in corporations. However, real estate tax is not a DIY project. If you’re serious about investing, get professional help.

ray

import · October 11, 2005, 3:47pm

Re: LLC vs Individual - Posted by iKwak

Posted by iKwak on October 11, 2005 at 15:47:47:

I’m wondering about this too. Inputs would be appreciated.

import · October 17, 2005, 1:29pm

Re: LLC vs Individual - Posted by michaela-ATL

Posted by michaela-ATL on October 17, 2005 at 13:29:41:

“Generally, LLCs are used for long-term hold properties, and short-term flips are done in corporations.”

Ray,

I’ve always had people advise the exact opposite. I thought you’re supposed to use an LLC for your flips, so that you can avoid being considered a dealer due to multiple buys/sales. And that long term properties are supposed to be held in a corporation.
Michaela

import · October 13, 2005, 3:29pm

Re: LLC vs Individual - Posted by Berno

Posted by Berno on October 13, 2005 at 15:29:35:

Thanks Ray. I currently have a half dozen SF homes that I rent, but I’m going to be purchasing a couple to flip to get some $ in the bank. I have been operating it just as an individual and am kicking around weather to do an LLC for protection or other advantages. My accountant told me that it wouldn’t benefit me but hey, I trust some of you more than some of the professionals I meet!