All Forum Posts by: Bill Walston

I'm not sure how you're getting "royalty" income from your own buy and holds, but I digress. As a general rule, unless the profit is substantial or the corporate rates are lower than personal rates there is no tax benefit derived from having passive income taxed in a corporate entity. Is your LLC a single or multi-member?

As @ChrisS. said, it pays to hire a good tax pro.

What @Steven Hamilton II said.  You never, NEVER want to hold investment properties in a corporate entity.  The "flip" income MAY benefit from a corporate tax structure, but that would depend on the amount of net profit earned this year.  It's good that you're consulting your tax pro.  He (or she) is in the best position to give you advice appropriate for YOUR tax situation.  One size does not fit all ;)

@Dev Horn , no a lease and option is NOT "creative financing." Neither a true lease nor option is a financing instrument. Not understanding these strategies before attempting to implement them is what will get your a$$ in trouble.  Just sayin'

I agree with @Jon Holdman - and why, since you "know it's wrong," would you even pose the question?  This smacks of the old "everybody's doing it" argument.

@Tyler Smiarowski, I think if you read my post that you reference you will see that it in no way contridicts what I've said in this thread.  It clearly states that IF you are a dealer by IRS deninition then you will be subject to self-employment tax.  IF you are NOT a dealer then you will report on Schedule D.  That's the same point I make here.  Income from flips ARE considered dealer income.  The fact that the OP states that he bought a property to "flip with a partner" is enough to establish intent to buy and sell for a profit .

I agree that the IRC isn't always black and white.  After nearly three decades in the tax biz I can confidently say that the system seems neither fair nor logical at times.  But it is what it is.

@TylerSmiarowski, you're just wrong on your assertion. If your INTENT is to buy a property to wholesale to another investor or to rehab and sell to an investor or an owner occupant the income from the sale of that property is earned income taxed at both ordinary income rates AND subject to self-employment tax. Period. The number of deals is irrelevant. The IRS has not established a "magic number" to determine when one becomes a "dealer" as opposed to an "investor." One deal meets the requirement if the intent is to buy and sell for a profit (see S & H, Inc., v Commr., 78 T.C. 234).

An investor buys with the intent to hold for appreciation and/or rental income.

As to your absurd attempt to compare wholesaling real estate to "dabbling" in the stock market my response would be that the teacher is not buying the stock to sell to another investor for a profit. He's buying with the intent to hold with the hopes that the stock will increase in value (appreciate) and/or pay dividends. That is, by definition, an investor.

That said, if the taxpayer erroneously reported this sale on a Schedule D, you're right - he (or she) wouldn't trigger the self-employment tax. Would it get caught by the Service? Probably not. Does that make it right? Not at all.

I do agree that the OP should talk to his CPA. I think you'll see that I suggested that in both of my prior responses to him.

 May I suggest that you speak to your CPA sooner rather than later.  "Later" may be too late to properly structure your business and deals to take advantage of the tax laws.  And make sure that you aren't confusing real estate DEALER with real estate PROFESSIONAL - it's easy to do.  It's very difficult to qualify as a real estate professional if you have a different primary occupation due to the hours requirements and other circumstances that must be met.  Dealer status depends pretty much on what you intend to do with the property when you make the purchase. There is no "number of deals" that you have to do before you can be considered a dealer for tax purposes.

So, a few observations...

First, you say that you LOANED some of the purchase price.. Are you going to get your loan paid back prior to profit split? Or are you going to ignore the loan and just get 50% of the deal?

Are you going to forgo the commissions or are you taking commission and THEN 50% of the profit?

Did you spell all this out prior to your deal? Do you have any type of written agreement?

In theory, you should file a partnership return with the appropriate Schedules K-1. These amounts will be reported on your respective individual Forms 1040.

I don't suggest that you modify your listing agreement and take your 50% as commission. Your share of the profits is just that. A 50% share of the profits - it's not a sales commission.

Finally, I'm not sure who gave you the idea that "profit from the occasional flip" is not subject to self-employment tax. That's just not correct. Income from any property that you purchase to wholesale or rehab and sale is ordinary income and subject to self-employment tax. That said, the cap for income subject to the tax is around $117,000 - so if your W-2 income is in excess of that amount you will avoid self-employment tax on these profits for that reason.

I strongly suggest that you run this by your own tax pro.  He (or she) is in a position to know your particular tax situation and best advise you on the structure of the deal.

Dang it @Brandon Hall!  Apparently I was still in a "turkey coma" when I responded to that post.  As you can see, I completely read it as DEALER and not PROFESSIONAL and answered accordingly.  You are correct and, obviously, my inference WAS way off base.  Now, IF the OP had been talking about "dealer status" I would stand by my answer ;)

ummm - Did you bother asking the CPA WHY he didn't like the idea?  Most CPA's are pretty much on board with any tax strategy that will reduce a clients taxable income UNLESS there is a compelling reason not to.  For instance, you say that you have constructed your first "rental" and it is in service.  That statement alone would have me suggest that you NOT want to be a dealer.  Why in the world would you want your rental income to be classified as ordinary income and be subject to self-employment tax?  Why would you want the property itself to be classified as "inventory" rather than "investment property." That's what would happen if you were classified a dealer.  Notwithstanding the fact that you wouldn't be entitled to depreciation during your holding period, nor capital gains treatment if you ever decide to sell your rental.  Unless my inference from you statement is WAY off base (and I don't think that it is) I agree with your CPA.