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Updated over 7 years ago on . Most recent reply
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Tax Protection for Flipping Income
We're starting our flipping business this year in order to fund our buy and hold strategy. And I understand that income from rehabs/flips is taxed at the highest level. However, we intend to use all profits for the purchasing of our long-term holds. I'd like to keep as much as we can using a corporation. Is this following feasible?
Set up a corporation, with minor payroll of the owners, but keep a majority of the flipping profits with the corp. and have the corp. then purchase the buy and holds.
Will that reduce our tax liability? We have every intention of getting direct legal counsel, but wanted to vet the question on the forum first.
Thanks for any input!
Most Popular Reply
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What you do with income is not relevant to how its taxed. Income from flipping properties is EXACTLY the same as income from a shoe store. You get to deduct all your expenses, both the inputs (i.e., cost of good sold - the shoes you buy wholesale or the properties, labor and materials) and overhead (insurance, office space, etc.) but the net profit is taxable as ordinary income.
You may be able to shelter some of the income by using an s-corp. Because that's ordinary income, you must pay SET (self employment tax - social security plus medicare) on it. With a W2 job, the employee pays half of that and the employer pays the other half. With any self employment income, whether flipping houses or that shoe store, you pay both halves. If you do the flips in an S-corp or an LLC taxed as an s-corp, and you have enough income, you may be able to distribute part of it as salary (subject to SET) and part as distributions (not subject to SET). But the salary must be "reasonable", which is to say what someone might be paid to do a similar job.
There's no trick here. Fix and flipping is a job, not investment. Its taxed exactly the same as a W2 job. Doesn't matter what you're going to do with the money.