What would you do?

Question

Steven Hamilton II · Answer

@Michael Woodward ,

Here is the problem, flips are NOT passive no matter what anyone says unless you are the cash partner. If he used Schedule D he was wrong.  You would be better off with the corporation or LLC and just taking a small salary. Also you could have taken advantage of fringe benefits AND solo 401ks or even your own pension.

Tom Goans · Answer

@Tyler Jenkins,

Please Seek Professional Advice from Licensed Professionals

Legally, legal and financial advice can only be provided by a licensed professionals. You should only consider legal and financial advice that is provided by licensed professionals. Any other legal or financial advice is ILLEGAL and may be very incorrect.

Seeking advice from an attorney in the area where the property is located can be a wise and very economical decision considering the alternative. An attorney will assure you are abiding by the federal and state laws. Every state has unique laws. The attorney will also provide the best advice and options for your specific needs with a consideration for your future. The results will be legally drawn up agreements for your use.

It is also wise to seek advice from a licensed professional tax and financial planner to make sure the agreement structure best fits your present status, strategy, and future plans - including building an estate. It is one thing to make money; it is a completely different strategy to building wealth.

Legal advice from an attorney and a financial planner you hire will be the cheapest and wisest investment you will ever make.

Moreover, every investment, partnership, and individual is unique. There is no one correct answer. There are numerous options that must be considered and many mistakes that need to be avoided. Dissolution is one many forget. Death, incapacitation, spouses, and children are others.

And, yes, you will disagree on the smallest issues. The courts are full of such lawsuits.

Seeking professional advice from licensed professionals can be an extremely wise and very economical decision considering the alternatives.

May your future be full of great success.

James Vermillion · Answer

Tyler, if I am understanding you correctly you will be utilizing money from a partner, which means you need to think about how to structure the partnership.  I am not an attorney, but I would look into creating an LLC so that both you and the silent partner have ownership of the company.  You will need to carefully setup an operating agreement which will explain in detail the structure of the company, roles of each member, profit / loss sharing agreement, etc.  I would advice you discuss with an attorney once you have a more clear picture of the partnership and how it will operate.

Michael Woodward · Answer

@Steven Hamilton II , Thanks for all your input. I really appreciate it. It sounds like I need a new accountant.

@Tyler Jenkins , Sorry for hijacking your thread. As a follow-up to my original reply, I've flipped many houses and built several spec houses but, personally, I like flipping houses......especially the way the market is right now. I was building spec houses from 2004 to 2008 and just barely got the last one sold before the bottom fell out of the market. There's a lot of fear in the market right now that a new bubble might be forming so I want to keep my investments as short as possible.  I've developed a very specific set of criteria for buying flip projects that repeatedly produces turnaround times of 60 to 90 days..... instead of 8 to 10 months that the new houses were taking. I'm sure there are many strategies that would bring you success but for me, I'm staying as close to the emergency exit as I can until I see more stability in the market.

Steven Hamilton II · Answer

@Michael Woodward ,

Simply put, he is wrong.

Investments into flipping property ARE an active business no question.  If you were to do one property and not do another, it would be ok. However, the moment you decided to continue that because a profit motive

To ask how the IRS would:
	So if are you telling me you are not making ANY of the management decisions?
	Do you sign any contracts?
	Do you make any payments?
	Are you listed on the bank account?
	Do you pick the properties?
	Do you incur any expenses related to the income?
	Are you giving a personal guarantee?
	How many do you do per year?
	Are you ever working on more than one at a time?
	Do you arrange for the financing?
	Do you pick the colors?
	Do you pick the carpet?

And on and on.....

I can tell you right now that it is a active business. There is NO question about it.  Your 40 hour work week means nothing to the IRS.  This is where I do suggest a corporation (S or C) and tell you to utilize that in order to avoid paying too much in Social Security and Medicare.  If your personal income is over 113k, you will already hit the SS limit.  You will still give up Medicare on the income.

This topic has been discussed MANY times here on BP.

Michael Woodward · Answer

@Steven Hamilton II , Thanks for your reply. My accountant's justification for his suggestion was that I work 40+ hours per week at a regular W-2 job and my activity in the real estate business is really just limited to due diligence. Are you sure that wouldn't qualify as investment income? Where do they draw the line?

Michael Woodward · Answer

@Tyler Jenkins , What you're describing is very similar to the way I started. I used someone else's cash to flip properties and put everything in my name to keep things simple.  My accountant told me that if were going to be actively working on the houses, I would be better off forming an LLC for tax and insurance purposes. Since I have a full-time job though, and don't do any of the work myself, he said that I should just treat my real estate flips like passive investments (I forget which IRS form he said it was).  Eventually, I'll quit my job and form the LLC. He also advised having an "Umbrella" insurance policy on myself for protection....which I have.

My plan going forward is similar to yours as well in that I want to use my flip cash to eventually start buying investments to hold. It's a strategy that many investors use. I'm holding off on buying rental properties though until I see what the effect is going to be from the big investment companies that are pouring into the rental market....better safe than sorry in my opinion.  Flips are quick...get in...get out....with minimal risk (if done correctly) so I'm sticking to that for now.

Hope this helps.  Good luck!

Aaron Montague · Answer

To the basic legal items: put it in writing, whatever you decide.  Then have notarized copies made of the document and give a copy to all involved parties.  Do this for peace of mind, not because you want to define your "partnership" in any way.

With $150k in cash, I'd find one financed Buy and Hold property and use the remaining money to finance a flip.  Your wife's access to MLS data and her customers will give you a big leg up in any market you are looking at.

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