Best structure for flipping

[Michael Seeker]

I'm about to finish my 2nd flip and am looking to purchase my 3rd within the next 2-3 weeks. The first two were just purchased and held in my own name, but I'm wondering if this is the best way to do this?

I have rental properties set up in LLCs, and would like to know the best structure for flipping. If I only have 2-3 houses at any given time, is there a distinct advantage (tax or liability) to holding the properties in company rather than my own name?

Thanks in advance for any feedback!

[Chris Calabrese]

Originally posted by David Beard:

Flipping is "RE dealer" activity, and all profits are subject to Self Employment tax (12.4% soc security tax up to $110,000 of earnings, and 2.9% medicare tax wtih no earnings cap). The typical benefit of s-corp status is that it enables you to pay yourself a "modest" salary, which would be subject to these taxes. Then the residual earnings are considered dividends and not subject to these taxes. You need to run this by a good RE CPA however, as in the case of one guy with no employees, the IRS may not allow the salary carveout, I'm told.

To elaborate, we are a 2-person LLC taxed as an S-Corp, and our CPA recommends taking 50% of income as salary, or maybe as low as 40% if you have a larger income and want to be aggressive.

So as an example:

You earn $100,000 for the year. As an individual or LLC, you would pay $13,300 in SE tax (currently 10.4% SS and 2.9% Medicare), but as a Corp you could take a $50,000 salary, on which you would only pay $6,650 in SE tax and take the other $50,000 as a dividend. Income over $106,800 isn't subject to the SS tax anyway, so most of the benefit goes away after you've made double that amount.

Keep in mind that you'll have to have someone do payroll and withholding for you, which will eat up a little bit of your savings.