Questions about using LLC for flips...

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Questions about using LLC for flips...

Brandon Stiles
Northwest Arkansas · Member since 2023 · 58 posts · 21 votes

I know I need to sit down and talk to an accountant before moving forward but I was hoping someone could help clarify a few things for me.

I'm planning on creating an LLC for house flipping. Mainly so I can elect to be taxed as an s corp and reduce some of my SE taxes. I'm going to take out a heloc on my primary to fund the DP and rehab, then ideally pay it back once I sell the home, rinse and repeat.

Can I take out a heloc on my primary under my LLC?

If I take out the heloc in my personal name but use it towards business operations how do I do this on paper? The heloc acc and home purchase would be on my personal credit and not my business credit correct?

To my understanding, if I transfer the home to my LLC I'm not actually transfering ownership so would it still be considered a personal asset vs inventory for my business?

From what I've read it can be difficult to purchase directly under an LLC so most people transfer but I'm not really understanding how it works in regards to accounting.

I want to keep my personal accounts and business seperate but I'm struggling to understand the process in this scenario.

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Luis Alvarez
Real Estate Consultant · Colorado Springs, CO · Member since 2014 · 86 posts · 64 votes
2y

@Brandon Stiles I'm going to preface this with saying that I have a legal background in estate planning and asset protection, and before law school I majored in Economics/Business Strategy.  However, this is not specific legal advice, just my opinion.

The overall theme of what others mentioned is about right, the main thing it seems you are concerned with is how this all plays out as you fund the LLC from the HELOC, go through the repair process, sell, and rinse/repeat. Acquiring the property in one's personal name and then transferring to an LLC (as long as it's done correctly) typically would not trigger a due on sale clause (this is one of the biggest incorrect beliefs on BP and the internet in general). I can always elaborate if specifics are needed. When you mentioned "To my understanding, if I transfer the home to my LLC I'm not actually transferring ownership so would it still be considered a personal asset vs inventory for my business?" that is incorrect.  Transferring title to an LLC does actually transfer ownership to the LLC.

I'm not a CPA, and this is not tax advice, but it may be prudent to have an LLC (taxed as an S-Corp) to help with the active income and have an LLC (treated as a disregarded entity for tax purposes) be the one that holds title to the properties. So you have some operational distance.

Keeping separate bank accounts is not only paramount, but it makes things cleaner and allows you to scale easier later on. 

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  • Account Closed
    Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes
    2y
    Quote from @Brandon Stiles:

    I know I need to sit down and talk to an accountant before moving forward but I was hoping someone could help clarify a few things for me.

    I'm planning on creating an LLC for house flipping. Mainly so I can elect to be taxed as an s corp and reduce some of my SE taxes. I'm going to take out a heloc on my primary to fund the DP and rehab, then ideally pay it back once I sell the home, rinse and repeat.

    Can I take out a heloc on my primary under my LLC?

    If I take out the heloc in my personal name but use it towards business operations how do I do this on paper? The heloc acc and home purchase would be on my personal credit and not my business credit correct?

    To my understanding, if I transfer the home to my LLC I'm not actually transfering ownership so would it still be considered a personal asset vs inventory for my business?

    From what I've read it can be difficult to purchase directly under an LLC so most people transfer but I'm not really understanding how it works in regards to accounting.

    I want to keep my personal accounts and business seperate but I'm struggling to understand the process in this scenario.

    It's actually not clear what you want to accomplish. Flipping is taxed at the highest rates. Buy and hold gives you tax advantages. There are a variety of ways to accomplish things and I'd be happy to discuss those with you. Because it gets into personal matters it would need to be done outside of the forums. 
    1Reply
  • Ahad AliPro Member
    CPA/Investor · Bronx, NY · Member since 2018 · 236 posts · 45 votes
    2y
    Quote from @Brandon Stiles:

    I know I need to sit down and talk to an accountant before moving forward but I was hoping someone could help clarify a few things for me.

    I'm planning on creating an LLC for house flipping. Mainly so I can elect to be taxed as an s corp and reduce some of my SE taxes. I'm going to take out a heloc on my primary to fund the DP and rehab, then ideally pay it back once I sell the home, rinse and repeat.

    Can I take out a heloc on my primary under my LLC?

    If I take out the heloc in my personal name but use it towards business operations how do I do this on paper? The heloc acc and home purchase would be on my personal credit and not my business credit correct?

    To my understanding, if I transfer the home to my LLC I'm not actually transfering ownership so would it still be considered a personal asset vs inventory for my business?

    From what I've read it can be difficult to purchase directly under an LLC so most people transfer but I'm not really understanding how it works in regards to accounting.

    I want to keep my personal accounts and business seperate but I'm struggling to understand the process in this scenario.

    Hi Brandon, 

    You cannot take an heloc loan under your LLC on your primary. Instead, you can take heloc in your personal name and transfer fund to LLC which will be called as LLC member's investment. By the nature of business, flipping house will be consider as an inventory and once you sold your house, you can pay it. you must keep documentation of this fund transfer.



    1Reply
  • Brandon Stiles
    OP
    Northwest Arkansas · Member since 2023 · 58 posts · 21 votes
    2y

    @Ahad Ali Thanks for the insight. If I'm flipping one SFH at a time would you recommend purchasing it in my name with conventional loan and transferring it to the LLC (risking due on sale)? Or should I just purchase under the LLC with commercial loan and deal with higher down payment and interest?

    0Reply
  • Account Closed
    Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes
    2y
    Quote from @Brandon Stiles:

    @Ahad Ali Thanks for the insight. If I'm flipping one SFH at a time would you recommend purchasing it in my name with conventional loan and transferring it to the LLC (risking due on sale)? Or should I just purchase under the LLC with commercial loan and deal with higher down payment and interest?

    The answer to that depends on your risk tolerance. What we do is buy "off market" into an LLC, using the existing seller's loan (taking it Subject To) and then when the flip is sold, we pay off the seller's loan. It saves a lot of up front cash.

    0Reply
  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    2y

    @Brandon Stiles

    You've got a bunch of stuff here.

    First, unless you are really making profit, it may not be worth it to make the S Corp election.  Also, what is your current income?  Remember the SE taxes hit a cap, and its capped across your entire income.  At most, that is your potential savings, assuming you get that much profit.

    You can take the money from the hloc. You just contribute it your LLC.

    People have "difficulties" purchasing directly under a LLC because they generally want to use cheaper, conforming residential loans. Or they don't know any different. You need to use "commercial" financing when purchasing with LLC, e.g. dscr, hml, etc.

    Nice youa re worrying abouthte accounting. Its pretty simple, sort of. You have two separate books, as if two separate people. To make sure you protect your corporate veil, you need to keep the expenses straight. You need to make entries in your bookkeeping as you move the funds around. Owner's "draws" are taking funds out of the LLC to yourself. "Contributions" are personal funds you move to the LLC.

    0Reply
  • Brandon Stiles
    OP
    Northwest Arkansas · Member since 2023 · 58 posts · 21 votes
    2y

    @David M. Thanks for the response. Sorry I know I threw a lot of stuff into one post. If I remember correctly the SE tax cap is around $160k income for the SS portion, but with the S corp I would only have to pay SE tax on my designated "salary" if I understand it correctly. I have other w2 income right now but not planning on having it much longer if things go as planned.

    I understand theres various types of commercial loans, are there any commercial loans structured similarly to a residential 30 year? If so what kind of down payment and how much higher is the interest on average?

    0Reply
  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    2y

    @Brandon Stiles

    Right, the "reasonable salary."  Anyway, I guess its up to you and how well you do.  Remember, once you make the election, you are pretty stuck with it.  Also, its generally not advisable to hold real property in a corp-like entity, such as the S Corp.  There are tax disadvantages that can "bite you."

    Yes, there are loans that have a 30yr term and 30yr amortization.  One particular product is the dscr that you must have heard so much about.  You'll still need a healthy ~20% down I believe, and I thought at least a full point or two above conforming investment loans.  However, I don't use them and with the rates jumping around so much, not entire sure.  But, you say you are flipping.  Who cares?  

    0Reply
  • Luis Alvarez
    Real Estate Consultant · Colorado Springs, CO · Member since 2014 · 86 posts · 64 votes
    2y

    @Brandon Stiles I'm going to preface this with saying that I have a legal background in estate planning and asset protection, and before law school I majored in Economics/Business Strategy.  However, this is not specific legal advice, just my opinion.

    The overall theme of what others mentioned is about right, the main thing it seems you are concerned with is how this all plays out as you fund the LLC from the HELOC, go through the repair process, sell, and rinse/repeat. Acquiring the property in one's personal name and then transferring to an LLC (as long as it's done correctly) typically would not trigger a due on sale clause (this is one of the biggest incorrect beliefs on BP and the internet in general). I can always elaborate if specifics are needed. When you mentioned "To my understanding, if I transfer the home to my LLC I'm not actually transferring ownership so would it still be considered a personal asset vs inventory for my business?" that is incorrect.  Transferring title to an LLC does actually transfer ownership to the LLC.

    I'm not a CPA, and this is not tax advice, but it may be prudent to have an LLC (taxed as an S-Corp) to help with the active income and have an LLC (treated as a disregarded entity for tax purposes) be the one that holds title to the properties. So you have some operational distance.

    Keeping separate bank accounts is not only paramount, but it makes things cleaner and allows you to scale easier later on. 

    1Reply
  • Jake BakerBusiness Member
    Flipper/Rehabber · San Diego, CA · Member since 2020 · 1k+ posts · 696 votes
    2y

    @Brandon Stiles

    You cannot take out the HELOC under your LLC for your personal property. If you quitclaim the property to your LLC, I believe it will be more difficult to obtain a HELOC after that. Check with a lender on that one.

    As a bookkeeper, I would show it as the following on your books: The HELOC is in your personal name. If you transferred HELOC money to your business account, it would be categorized as an owner contribution. Just as if you contributed cash to the business, it wouldn't matter to the LLC if you borrowed that cash was borrowed or not - the LLC is not paying the interest on it.

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