dealer status in flipping?

[Michael Gao]

Hi, BP fellows,

I started to venture into the flipping world this year and has been successful at my first deal in summer. Now I am doing my second. Unfortunately, I bought both of these properties under my personal name, not knowing that there is a scary thing called "dealer" status that could eat into my profits through self-employment tax.

Here is my situation: I have a day job with good W2 income through which I have already maxed out my self-employment contribution in 2012.

Questions:
1. I am doing flips sort of as a hobby to test out the water. Am I still seen as a dealer by IRS?
2. If I am seen as a dealer, do I need to worry about self-employment tax because I have already maxed it out through my day job?

Thanks for reading and answering my very first post!

Best,
Michael

[Steven Hamilton II]

Michael Gao,

I apologize, I didn't see this thread earlier.

If you are attempting to make money in a venture you are in business. You are a dealer based upon the fact that you are flipping houses. If you are doing this in your personal name, yes you will be subject to tax at your ordinary rate AND self employment tax, which in your case you will only have to worry about both portions of Medicare.

You should set up the S-corp in the state you are in; however, an S-corp may not necessarily be the best for your situation. You need to sit down with you accountant and your attorney to determine.

Here is a thread on basic tax entities to familiarize yourself with before you speak to your accountant and attorney: http://www.biggerpockets.com/forums/12/topics/76052-simple-taxation-questions

S-Corps do not distribute dividends as many have said. They give "distributions" which are taxed at your ordinary tax rate.

There are many good accountants out there; however, you want to find one with real estate experience. Here is a thread that offers great advice on things to find: http://www.biggerpockets.com/forums/51/topics/70447-questions-to-ask-a-cpa

A flip done in your name will be treated as a business. I'm sure you have heard someone at some point mention "Schedule C" This is the form that you will report the income and expenses on: http://www.irs.gov/pub/irs-pdf/f1040sc.pdf

Michael,

If you have any questions please don't hesitate to ask if you have any questions. I check in almost daily and am happy to answer questions.

-Steven