LLC questions

[Lee S.]

First off, I spoke with my CPA regarding an LLC and I'm wondering if she is correct regarding the taxes on an LLC. She stated that if I were to buy and sell a property under an LLC that the entire gross amount would be taxed. Example, buy house for 200k, sell for 250k, taxes are paid on 250k not the 50k profit. This can't possibly be true?

I don't think an LLC makes sense on a cost and time basis and I don't think it will really protect me that well if I do ever get sued. I'm just getting started in RE investing and haven't done any transactions yet. I do have a 1 million umbrella policy on my home owners insurance but i've always had that. I would rather spend a few more bucks and increase this policy then deal with the hassle of LLC's for liability reasons alone.

My last question, and this may change my mind on an LLC, would it be possible to have an LLC setup so that my wife and I are both members, I'm allowed to do everything in the name of the LLC without her also signing off because she works full time, yet have all LLC profits paid in her name for tax reasons? Never had an LLC so I apologize if this is a stupid question. Thanks.

[Matt Robinson]

Lee, of course I have to begin my response by saying, "consult an attorney on all legal and tax matters". But, for what it's worth, a lot of this depends on WHY you are starting the LLC. If you are just looking for limited liability, most of that can be covered with really good insurance. Perhaps you should look into increasing your umbrella policy? However, eventually you are much better off holding property long term in some kind of entity like an LLC or corporation.

Most estate planning attorneys and those looking to limit liability will encourage you to start an LLC, and then place each property in a separate trust, with the LLC as the beneficial interest. This is really good advice on long term holds, but probably overkill if you have a short holding window, or are just getting started with your first property.

However, for tax purposes, an LLC acting as an S-corp is your best bet. And NO, you don't pay taxes on the TOTAL SALES PRICE...that's the dumbest thing I've ever heard. Fire your current CPA immediately. Even in your worst case scenario, you would pay taxes on the difference between the purchase and sales price, but you should also be deducting obvious expenses like repair costs, etc...and only paying taxes on the final profit.

If you have an LLC acting as an S-corp, you would pay taxes on your profit at your ordinary income tax rate, whatever that might be. However, you can also pay yourself a reasonable salary, and take the remaining amount as dividends or passive income, thereby avoiding the 15.3% self-employment tax. Again, the caveat is to definitely consult a CPA or accountant before making any of these decisions...it just needs to be a non-moron accountant (like your current one).