Do we LLC if wife is going for RE license?

Question

So my wife and I were brainstorming thinking about how we want to establish our presence in this market and ran across an interesting predicament. She is looking to attend a class and get her license for real estate and I was looking into LLC creating because in Michigan it is fairly cheap to maintain (from what I've heard).

My question is would it be wise to establish a LLC if my wife is pursuing her real estate license? We are looking to start by possibly wholesaling or flipping to generate capital for future investments asap.

Would there be tax gains by having a LLC if she has her license, I'm aware that there are some tax advantages to her having a license but not sure if doing an LLC is worth it.

Your advice is greatly appreciated and I look forward to learning with everyone!

Joe

Nathaniel Busch · Answer

Joseph,

Putting the properties into a standard LLC will not have any affect whatsoever on the passive loss rules or NII.

The LLC taxed as S-Corp scenario is beneficial for placing flip / wholesale properties into. As for rentals, there are no real immediate tax benefits for placing them into an LLC, rather only legal benefits per most attorneys.

Check with insurance agent re: umbrella policy question. I'm not one.

Something to clarify - your wife qualifying as a real estate professional does not necessarily hinge on her being a licensed real estate agent. Having a license could help in an audit, but the real determination of her status as an REP is dependent on her meeting the participation and hours tests involved in any field of real estate, whether it be flipping / wholesaling / landlording / etc.

Nathaniel Busch, CPA

Jon W. · Answer

@Joseph Harper I do not know about the tax implications with a licensed agent but if you are just wholesaling and flipping, a good umbrella policy might be easier to cover risk.

Nathaniel Busch · Answer

Joe,

You've got several different items at play here.

Is your wife pursuing her license to receive commissions for others? Or solely to keep commissions from sales / wholesales of your own properties? Or both?

In either instance, most state licensing boards for real estate agents wouldn't permit you to mix one's sales commissions activities into an LLC that is also generating wholesaling / flipping income. I have no idea what Michigan's rules are - you may want to inquire with their board for realtors.

But, if you see yourself getting into wholesaling / flipping any time soon, there is tremendous value in setting up an LLC and potentially electing it to be taxed as an S-Corporation. Doing so can lessen the impact of self-employment tax (i.e. dealer tax) and give you greater control of when and how you pay it.

In the absence of an LLC / S-Corp, you could find yourself routinely paying the full 15.4% dealer tax on top of your normal income taxes on any and all profits from wholesaling / dealing.

Establishing a separate LLC for the sales commissions / real estate agency stream of income likely wouldn't be worth it unless she's receiving commissions from representing outside investors in addition to your properties. So, it may be worth keeping that activity as a sole proprietorship, outside of the wholesaling / flipping LLC.

Lots of moving pieces here. Make sure you're working with a tax accountant that knows what they're doing in this respect.

Nathaniel Busch, CPA

Nathaniel Busch · Answer

The original poster mentioned he needed to begin this activity for purposes of generating capital, not withdrawing the capital.

Thus, they could initially incorporate the activity and actually avail themselves of ANY self-employment tax in the first few years if they end up reinvesting all of the profits back into the company as capital necessary to do more deals. Theoretically, a salary and all of these payroll forms wouldn't need reported until several years down the road when the client actually begins drawing upon the capital versus reinvesting into the company.

I usually find this scenario to be representative of flipping clients looking to use the activity to shore up capital over the first few years of activity. Why not defer employment tax into later years if the activity turns out to be profitable, yet draws are not taken?

Nathaniel Busch, CPA

Nathaniel Busch · Answer

Steven,

Note that I used my language carefully. I said using an S-Corporation would LESSEN the impact of employment tax, not eliminate it. Yes, there must be a reasonable compensation paid.

Nathaniel Busch, CPA

Steven Hamilton II · Answer

Nathaniel,

As you stated about licensing boards I will agree. In additional no self respecting attorney should be comfortable with that either.

These income sources need to be kept separate as they are completely different activities.

That is not entirely true in the savings of SE Tax. You must pay a reasonable salary. That means that they must both halves Social Security and Medicare on that salary.Another issue at play here is a realtor taxing their activity as a corporation. For brokers it is different; however, reasonable compensation on a activity in which your personal services generate the income suggests the compensation be much higher.

That said if they want to utilize an LLC taxed as an S-corp for flipping, understandable; however, I would suggest they wait until they start bringing in money as right now they would have to file additional tax returns (940s, 941s, 1120/1120s, or even a 1065 if they are both members of the LLC) and they could realize they don't like the activity.

One item that must be taken into account is if they become a multi-member LLC, then a sole proprietorship is not an option as they will have formed by default a partnership.

-Steven the Tax Guy

Joseph Harper · Answer

Thanks for the information guys, there are definitely a lot  of variables to think about. Though, I'd like to take my question a step further.

Is there any benefit to putting our investment properties into an LLC if we plan on flipping them or is that only recommended if it is an investment property that will be a rental? In which situation would an umbrella policy be most effective to cover risk associated with investment properties?

Furthermore, if my wife becomes a licensed real estate professional will the tax benefits (such as not being subject to the passive loss rules and NII tax)  be voided if our properties are in an LLC?

George P. · Answer

one has nothing to do with the other.

short answer - yes.

Do we LLC if wife is going for RE license?

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