Investor, Real Estate Agent, and “Flipper”

[Shawn Cunningham]

Thanks for taking the time to read my post! I have been working diligently to educate myself, and just when I think I understand my best strategy, I learn something else or get clarification that changes my view, and I would love some wisdom! 

A year ago, I opened my own real estate brokerage, and last year I completed 45 transaction (most of them in the 60k range, on average). I keep hearing about “real estate professional” status, and I’m not sure if that will be helpful with my other businesses, and if so, how? 

In June of 2019, my husband and I started a new Investment LLC with a partner. We've acquired 7 properties since the summer. One property, which is six acres, is currently being rented. In the mean time, we have just paid a survey company to divide it up in to four smaller parcels. My desire would be to take profits from other sales to add hard improvements to the property and rent those remaining four lots out for tiny homes/mobiles. However, I'm not sure if we will have the capital back from the other properties to swing this. So, if we sell two, to pay back our investor for the original purchase, is that counted as "gain"? We purchased the property for 76k, and I think the front two lots will sell for about 90k, which, after our expenses, would bring us to about even on what we've spent. If we have to go this route, how are sales taxed if we don't make money, but still own two parcels we are renting?

We also have a land clearing company (separate LLC), which was actually started about 5 years ago. We own one piece of heavy equipment for clearing land. I want to make sure that if we do any work on the land/properties, that the LLC owns, that I am able to pay my land clearing company for work done out of the investment company? I really don't want to raise "red flags", so to speak. When we used the equipment to clear the six acres last week, I took photos of before and after so that if I'm ever audited, I will be able to show that real work was done. It's obviously taxed at a lower rate, so that's my concern. I'd rather just pay the extra if I'm going to draw scrutiny.

Same with my real estate brokerage, if I list the property, is me taking profit that won’t be taxed at a higher rate be seen as violating any laws, or raise concern during an audit? 

On the properties we plan to keep, I've heard various positions. Do we move the "holds" to a separate LLC/land trust, so that there is a definite difference between flips and holds?

On the properties we are selling, that are going to be considered “active income”, does a S Corp help with being taxed less? If so, how? Since my husband and I both have a thriving real estate brokerage, could we each pay ourselves $1000 a month, since this isn’t our “real jobs”? What if the “flips” start generating more income than our work as Realtors, even though the time spent is considerably less? 

Do you no longer have to pay the (15%, approx) self-employment tax after $117,000? I know there is another small percentage you have to pay, no matter what the bracket. However, if make 200k in my real estate brokerage in 2020, and make 300-400k taxed at “dealer status”, would I stop paying the 15% after that 117k?

And, if I use my profits to roll back in to the business to improve properties, do I pay taxes on those gains, and then put the cash back in, and as long as the house/land is sold within 2020, be able to write off the money I put back in the company?

I don’t want our net profits to go over 317k, if I can avoid it! For example, outside of my normal real estate business, about 10 times a year, my husband and I go to ranch sales. He has a 4x4, but I don’t, and so it’s really difficult to be bouncing around caliche roads in my little suv. My husband says that we can write off a 6 seater atv, to use at ranch sales. We don’t own a ranch ourselves, so, the vehicle would likely only be used for the sales. Is that a legitimate write off? 

I honestly want to protect all the hard work my husband and I have put in to these businesses, but I don’t want to be dishonest. So, I’m not sure how to best proceed. Any insight would be sincerely appreciated! 

THANK YOU in advance for any suggestions!