First Flip... to LLC, or not to LLC?

[Steven Cramer]

Hey all! I'm looking at purchasing a single family unit in West Philadelphia (E. Parkside) for a fix and flip with my father. We're 50/50 partners in the business; I'm a licensed Realtor in PA, he is not. This is our first flip together, though each of us have purchased homes individually in our own names before. We are looking to flip this house and roll the profits into future projects with a 1031 exchange.

I've heard arguments both for and against using an LLC at all in flipping homes; even on the "to flip" side, I've heard arguments for utilizing LLCs in many different ways. So herein lies my question; should I, or should I not, use an LLC to purchase this property?

[Dave Foster]

@Rich O'Neill, It's kind of semantics.  But a flip is what a flip is. And you cannot 1031 a flip (property that you purchased with the primary intent of resale as @Steven Cramer said).  If your intent is to hold the property for productive use then it qualifies for a 1031.  

As far as we can tell 1031s are not audit triggers in any way. But you need to be able to demonstrate your intent if you are ever audited. People in Steven's situation who use 1031 effectively are those who change the model. Instead of fix n flip. They fix n rent n evaluate after a while. Add to that a refi after the fix part and you can get the cash back to buy your next project while your intent on the 1031 property is seasoning. This is why the infamous BRRRR method works so well with 1031 investors who want to also be active buying and rehabbing.

Entity creation when contemplating 1031s takes some careful thought so you keep the greatest flexibility and avoid tying  to together with your partners.