Spend some time reviewing some of the responses from Bill Bronchick here at this site. Click on the “Legal Corner” in the upper left corner.
Look into separating properties you flip (these will be treated by the IRS as dealer properties) from the properties you hold (passive income).
Bronchick’s material is very good and can help you set up and understand these entities. You may also want to look into utilizing Land Trusts as well. All this and more can be found here and at his own site.
I am going to file one of these entities with the intention of holding some property and flipping some. What are the tax, asset protection, or other issues for me to consider?
Posted by J. Clifton on March 23, 2000 at 01:33:16:
In the big scheme of things, the most important consideration first and foremost, is setting up a liability firewall for your assets, not the tax issues. There are 3 kinds of risk exposure you face in the RE business—legal, financial and tax exposure. Your losses with tax exposure are limited to a fraction of your profits, while your financial risk may typically run up to 100% (you may lose your entire investment of capital and labor); but a single suit could wipe out your entire estate. Flips should be done within a corporation, but “dealer” status doesn’t really become an issue unless/until you have done a lot of them. So set up an LLC now (it’s much simpler to run) and make some money, as you can always create a Corp. later to separate active “dealer” profits from passive income.
S corps pass through all income to the individual. so does an LLC. The bigger problem is that you said that you were going to flip some and hold some. That could be a potential problem with the IRS DEALER status. By having two distinct entities, one of which could be you indivdually, you can separate dealer properties (flips) and non dealer property (keepers).
If one of those entitiies is you the individual then you don’t have the corporate veil protection.
One accountant a CPA told me that s coprs can’t have passive income therefore, you must be a dealer.
Dealers have NO long term capital gains, everything is short term even over 12 months. Dealers can’t 1031 exchange. And I “think” they must take all gains in the year reported whether received that year or not.
I’m not an accountant and don’t even want to play one on TV.