All Forum Posts by: Account Closed

Question about a possible alternative to the LLC with scorp tax election.

LLC with Scorp tax

@Brandon Hall, @Steven Hamilton II:)

I see 3 downsides to running with the LLC with scorp election.

1 Separate tax return for each LLC and yourself.

2 Unemployment tax on your income- although limited to $8,500

3 Ambiguity on what a reasonable salary is for a house flipper.

For number 3, allow me to expand on my confusion.  I expect to make 250k this year flipping houses.  If I look up a construction foreman in my area the salary is around $45k.  I find this to be too low for a salary and the IRS will probably agree.  If I look beyond the construction tasks and attempt to add in other work related items I get lost.  Very hard to find comparable salaries. 

2 LLCs

I was suggest to use an alternative approach involving 2 LLCs. 

LLC 1 would buy/sell houses.

LLC2 would run payroll, have employees and charge LLC 1 an hourly rate for worked performed. Lets say for $50/hour per man.

LLC1would pay ordinary income on its profit.

LLC2 would pay ordinary income and self employment tax on its profit.  

Benefits to the second approach.

1. A clear way to calculate/determine what your self employment tax base is.

2. A single tax return.

3. No unemployment tax paid on my active income.

4. Easier to have multiple LLCs for asset protection, based on benefit 2 above.

5. In general I would expect less self employment taxes paid out.

Thoughts/issues/things missed

Thanks. 

@Chuck VanDyne

Yes.  Many folks feel that way and just pull the money out to invest with.  

@Will Barnard

Now that is a big league story.  Auesome.  

@Rian Ash

I would like to add that a quit claim deed may not be your best instrument.  It is my understanding that it will terminate your title insurance policy.  Why not use a warranty deed instead.  I don't think it costs more and will not impact your title insurance policy.

@Robert Ilario

Lots of folks get great deal at tax sales in NY.  I would like to add on word of caution in buying them. 

During this time the county is overwhelmed with general foreclosure proceedings on hundreds of properties.  So much so, they have to take on additional help to get through all the paperwork.  The folks they hire are not always the best and many do not do this everyday.  It is temp help.  Usually law students. 

Here is where the problem exists.  Often not all lien holders and interested parties are served correctly.  The result can be disastrous.  I had a county solicitor tell me that some Pa counties have at horrible track record.  1 in 3 sales have an issue.  The county solicitor is basically the county attorney. 

So my advise is know what your are bidding on and understand, or pay someone to understand if the foreclosure proceedings have been done correctly on a particular house. 

@Chuck VanDyne

In the initial post you wrote:

I can flip 10 houses a year and not pay capital gains tax on any of the proceeds until I withdraw it.

That is not  the case.  The IRS will not let you do this on a continual bases.  They will hit you with a unrelated business income tax (ubit).

Furthermore, you will never pay capital gains said proceeds, since all your money will be taxes as ordinary income when you take it out.

@Scott Trench

Can you give us an example of how a private money lender can take advantage of a borrower?  This is outside the basics of loan origination fees, points and rate.  I am just curious.

@Matt Motil

Interesting.  Do you take a trip or 2 out to see him in DC each year?

Oh sorry.  I think you are asking from the lenders side.  To quote the late Rosana Dana Dana, "Never Mind".

@Oscar Freiman

From my experience, the biggest difference between the two is whether you get a loan or not.  From what I have read, the only guys getting a non-recourse loan are those involved in multi-million dollar deals.

I cant see any issue with the non-recourse, but would expect you are going to pay a little more for your money since the risk on the lenders side is higher.