All Forum Posts by: NA N.

I have decided to start making offers on REOs without seeing them.
This way I will be making more offers and increasing my chances. There is too much competition, prices are way to high for investors and almost every REO I see has multiple offers. I can't keep looking at these homes and wasting the whole day for them not to accept my offers. I just need to change strategy.

My primary concern is if your offer gets accepted and after you look at the house you realize it won't work for you, do you HAVE to pay a Home inspector in order to get an official "inspection report" to walk away from the contract?

Or what excuse are you using for backing out?
Home inspections can get costly in my area, so if you are using another way, please let me know.

Also, on 80K homes, what amount of earnest money are you usually offering on your contracts that you know make a difference in how the bank sees and prefers your offer and how fast are the banks requiring that money in their office these days?

That's it for now.. thank for the input!

BEst

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Originally posted by J Scott:

It depends on how you define "reasonable salary." Some CPAs may say that if you only have $20K income in a given year from the business, all of that should be allocated to salary, as $20K is a small amount of income for the year for a typical real estate investor. If that's the case, there's no savings.

On the other hand, if your CPA said that you should be pro-rating that income based on actual time the business was operating, and said -- STRICTLY AS AN EXAMPLE -- that 40% of that income was to be paid as salary and the rest as dividend, then you would have a small savings on that 60% distributed as dividend.

Specifically, I believe self-employment tax for 2011 was 13.3% (up to a $106,800K limit on 10.4% of that), so the numbers work out like this:

1. Buying in your personal name and paying SET on 100% of net income:

SET = $20,000 * 13.3% = $2660

2. Buying in an entity taxed as an S-Corp and only taking 40% of net income as salary:

SET = $20,000 * 40% * 13.3% = $1064

So, in the second scenario, you'd save about $1600.

The thing I am finding out is that from your example above I would have to add to the SET of $1,064 the amount of excise tax in TN which is close to 7%.
So add $20,000 * 7% = $1,400 in TN Tax on the Net

So with this I get to pay $2,464 as an LLC vs $2,660 as self. IF I can get away with 40% salary.

I know you stated this as an example, but will It be possible to pay oneself less than 40% of net if I flip just one property in what is left of the year?

What would be the least I can pay as salary and still be ok with the IRS if ever audited? It is just 3 months left for 2012

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I will be talking to a CPA/Attorney tomorrow.

But from what Jscott is saying, since I am starting at the end of the year I might just be able to do just 1 deal before December 31st. In this case, how would a "net after taxes" be comparing flipping this one deal on my name vs LLC Scorp?

If it is just 20k profit and let's assume it is the only income I have for the year.

Would it be?:

In my name:
35% self employment tax of the 20k= $13,000 profit

LLC Scorp:
$300.00 LLC cost to form
$500.00 attorney to get operating agreement for LLC (average)
35% of $8,000 SE tax (40% of 20k as salary= $8k) = $2,800
7% excise tax of 20k = $1,400
Profit = 15,000

from this simple cost analysis it is 2k more profitable doing it in my LLC. Unless I am making wrong tax percentages.
Thoughts..

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Originally posted by Ken Latchers:

Originally posted by Joel Owens:

Does it matter if you hold the LLC in a different state but purchase in Tennessee versus setting up the Tennessee LLC??

Says Tennessee residents do not pay income tax except for dividend income.

I recently researched this exact question. If you hold it in your name, it will not be taxed in TN. If you hold it with ANY kind of LLC/corp located anywhere, you will be looking at perhaps 7% excise and franchise taxes. For my money, your own name and getting some extra insurance is a much better deal.

I am about to form an LLC taxed as S corp for flipping in TN, but have found about the excise tax and franchise you mention for the LLC in TN. So at this point I am not sure whether I pay less taxes for flipping rehabs by doing LLC Scorp or I should just buy in my personal name and get insurance.

Really interested more in paying less taxes at the end of the year than anything and maximizing profits. Suggestions?

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Also, Apparently creating an LLC will incur paying an Excise tax in TN of 6.5% plus franchise fee. So, I am wondering maybe, as some have suggested, it might even be more expensive in the end to do business as an LLC vs Self with good insurance? Let's say I just do a couple of flips by December and net 40k. Thoughts?

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Could anyone please suggest best ways to minimizing the amount of taxes you pay for properties you buy, rehab and flip for profit in a short couple of months period?

One scenario would be I use my own cash to buy and rehab the property.

Second scenario I get an investor (family member) to lend me the cash for buying and rehabbing. Basically giving me a loan.

I'm hearing "Cash out", but not sure how this is applied. And doubt that any bank would lend me at this stage when I am starting out.

If you could please give easy examples on your suggestion is set up and what tax benefit is gained (tax avoided) from doing this I'd immensely appreciate it.

Let's say 80k to buy house, 20 to fix, and profit is 20k by selling at 120k.

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you are all right. I should be seeking a tax attorney.
I will call around on Tuesday to see if I can find a good Att/Tax guy locally that won't be too pricey and determine if it is worth it then. I don't want to "overkill" this paying 1k to a guy for helping me form what should be the most simple form of doing business, especially since I am a one owner/member.

I am choosing to form an LLC and taxing it S corp just because it seems to be the most agreed upon structure for flipping homes among those who are deep in the business.

If this operating agreement is basically just living in a "folder" at home and no one knows if I even have one, if I ever get sued or need to have a strong agreement, shouldn't I just be able to THEN spend a lot of money for an attorney who will draft what I need to protect me and just back date it? Remember It is just me.. so the agreement is with me, myself and I.

0 Votes

great comments thanks a lot.

Good tip on having the bank apply and get a TIN (FEIN) on the spot. Saves one step with the IRS.

I checked out NOLO... good suggestion.

I still think I might need guidance or "rule of thumb" regarding how to keep things separate not to mess up the LLC if ever under suit.

David mentioned signing events and dates etc.. but now I am thinking i.e. what if I deposit 100k to the LLC and end up using a total only $95 and just need to get the other 5K out for whatever reason. Is that money stuck for business related purposes only and now belongs to the LLC? Or I can take it out as I please? Let's say I charge a restaurant or something like Amazon or ebay. Is that possible?

Also, after I sell the flip, let's say I have 120k from profits. How do I take that money out... monthly payments to me as salary? Can I take it all out at one time and just do a wire to my personal account?

Thanks for any insight on this.

Best

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I was wondering, after looking at several templates on the internet that look too general, if someone here at BP would be kind enough to provide a template tailored for the flipping homes business.
Here is how I will be forming the LLC:

1) Manager managed. Manager won't be owner, just manager
2) 1 member owner of 100% of the LLC
3) Manager is registered agent and able to sign on behalf of LLC.
4) LLC will be taxed as S corp.
5) There will be an initial "contribution" from me to the LLC to make the first purchase from LLC account.

I know I should consult an attorney/tax but at this stage I just need to get this going so I can start making offers in my LLC's name.

I understand this might be necessary in order to open a business account. Correct.

Anyways.. I appreciate if anyone could help.

Thanks

1 Vote

Originally posted by Brian Burke:

There are basically 3 ways:

1. Wait for the listing to go back on the market.

2. See if the agent will accept a backup offer after the OO reservation period has expired, with the hope of just moving into contract if the first buyer rescinds (without going BOM).

3. Partner with a non-profit. Most of the OO reservation periods also permit governmental agencies and non-profit organizations to submit offers. I've seen groups partner with a non-profit, the non-profit buys in their name, the operating partner does the rehab, provides the capital, and deals with the resale, and the non-profit and operating partner split the profits in some manner.

I'm not a fan of option 3 but it's a creative trick. I think the intent of the exemption is to allow non-profits to acquire affordable housing, but instead it is exploited such that the non-profit uses it to generate revenue. I wonder if "they" will catch onto this trick someday and change the rules to prohibit it.

@Brian Burke

I am liking option number 2 a LOT.. I need to get my LLC put together asap because there is one home that is a profitable flip that was just put under contract by an OO. I will send the agent my offer in hopes the buyer walks..
Good strategy.. Really.

As for number 3. That is a very sophisticated strategy for me at the moment. But I'm sure others might benefit from this tip.

Thanks for all your comments

0 Votes

All Forum Posts by: NA N.

NA N. has started 7 posts and replied 40 times.

Post: Making cash offers sight unseen and backing out

Post: Minimizing taxes paid on your Rehab/fliping business

Post: Minimizing taxes paid on your Rehab/fliping business

Post: Tennessee tax question

Post: Minimizing taxes paid on your Rehab/fliping business

Post: Minimizing taxes paid on your Rehab/fliping business

Post: Operating Agreement for Manager managed 1 memeber LLC

Post: Operating Agreement for Manager managed 1 memeber LLC

Post: Operating Agreement for Manager managed 1 memeber LLC

Post: How to compete with owner occupied REO buyers?