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All Forum Posts by: Giedrius C.

Giedrius C. has started 4 posts and replied 12 times.

In 2 would only fees I charge be treated as self employment income, or interest also? What if I don't charge any fees, only simple interest or equitable interest (% from profits)? 

After paid consultations with high profile CPA's who specializes in real estate I have contradicting answers to my question, I wonder what bigger pockets folks think about it.

Question is will irs assign dealer status to private lender who lends money for flips? One answer was that no, because interest is not subject to self employment tax, another answer from different cpa was that if it is continuous activity that brings significant % of person's income, then yes, the person will be treated as a dealer and his income will be taxed with self employment tax. What do you think? 

Originally posted by @David M.:

@Giedrius C.


First, may I ask what is your aversion to the self-employment tax?

Well, who wants to get extorted extra 15%?

As I understand you think a member of a single member LLC can't avoid self employment tax no matter how LLC is structured. If that's the case, I'll have to choose between multi member LLC, S Corp, C Corp or simply lending money. All of those other options have their own disadvantages, that's why I'm so eager to make single member LLC work.

Thanks everybody for chiming in. After the last conversation with my CPA I'd like to hear opinions of others about the structure we are thinking of.

Let's say I or my holding company 100% owns LLC in the state where flips will be done. That LLC is managed by a manager who's not a member of that LLC. I have no signing rights, I'm only passive owner. Manager is paid for his work % of the profits of the LLC. Will my distributions from that LLC be taxed with self employment tax or not? Would it raise any suspicions to IRS?

Originally posted by @David M.:

@Giedrius C.

I'm not a professional, but I'm with the accountants on this one. You are making a pretty specific case which needs to be handled with a serious consultation. I'm not sure how the irs will view a single member LLC with a passive, non-material particating owner. Especially one that does five flips in a year.

I think you dismissed @Michael Plaks idea for a S Corp too quickly. As I understand it, a S Corp by itself isn't a legal entity. It's an accounting status elected by a legal entity. So, it's not another entity to keep track of (well, unless you don't want to convert your existing LLC).

Furthermore, did I read one of your responses correctly you are investing out of state? Then you basically will another another entity to keep track of as either you register your existing LLC as a foreign entity in that State or you have to register a domestic entity in that State. If you don't have a LLC registered in the State, then you shouldn't have any asset protection at all from my layman's understanding.

Flips anyway are considered trade in inventory generally. So you are stuck with the profits as ordinary income. @@Michael Plaks idea to do a zero salary S Corp is intriguing for your case. It achieves your desire to avoid SE taxes. Most people are looking to reclassify the income as something other than ordinary income to change the applicable tax rate.

Look, you’ve got a few ideas from this public forum. Do yourself a favour and sit down with a qualified professional or two to see if there is a way to work this out.

Good luck

My LLC will be registered with the state where the flips will be done.

I have S Corp for my other businesses, so I have an idea how it works. In theory you can distribute all the profits as dividends if you aren't working in it, but according to my accountant, and superficial research I did online, if you do this when there are no other employees, you are asking for an audit, which I'd rather avoid, even if I'm right. Also, you must file F941 quarterly and tax returns for it annually on top of my personal return, which is additional hassle and expenses. And deal with payroll if you don't want to gamble with $0 salary.

I spoken to my US accountant regarding the house flipping partnership, but he's not specializing in real estate, he's doing taxes for my other activities, so he couldn't give me a confident answer. I thought people in this forum will have personal experience with the issue, it should be a common situation, and could give a more definite answer

It would be great to hear from other accountants or someone who dealt with the similar situation. Going LLC route would be preferable for reasons stated. If that's impossible without fighting IRS, then I'll have to choose between being passive partner in a partnership or a loan.

Originally posted by @Ashish Acharya:

There are seven listed test for material participation that determines the passive vs non passive nature of the income. If you could prove your involvement is passive, may be you have a case. 
 

Material Participation: A taxpayer materially participates in an activity if the taxpayer is involved in its operations on a regular, continuous, and substantial basis.

Look at test no two. If your contractor is working substantially all the hours, it's not a material participation for you. And I don't think you meet other test. I want to see what other experts here say on this. I rarely see owner of single member LLC with trade or business not subject to SE tax.

Thanks for the response. It shouldn't be a problem to prove that my activity is passive then - I will work 0 hours and won't even be in the state where the deals will be made, I will only make payments, and my partner will do all the work (finding deals, hiring contractors, dealing with permits, selling finished houses, etc.) and I will be paying his S Corp for his services. 

But I'm thinking LLC is pass through, so all the individual houses will go on my personal tax return and usually such activity is declared as active. Won't I invite an audit automatically by claiming on my taxes that profit from let's say 5 flips in a year is passive? If that's nothing unusual and it won't raise red flags to IRS, it will work. Otherwise it's not worth it, I'd rather deal with extra accounting or less control by structuring it as a loan than go through certain IRS audit, even if I'll end up right in the end.

@Michael Plaks - S Corp will involve unnecessary complexity - accounting for extra entity, dealing with payroll, and it won't solve the problem fully - part of the profits must be distributed as salary with all social security taxes and only part can be distributed as dividends. It would work if I was doing active business, but now I'm just a passive investor.

I will be a passive investor who will finance the flip and my partner will do all the work and we will split profits according to our agreement.

My preferable way would be to buy it in the name of the LLC I own 100%, my partner will deal with contractors and does all the work needed, my LLC pays for everything, we sell the property and my LLC pays my partner agreed percentage of the profits as a project management fee.

Can I treat the income from such an activity as passive and avoid self employment tax? As I understand I could for sure if I lent the money or we formed formal partnership where I was a passive partner, but what about the arrangement I described above? I prefer it because it gives me full control of the asset, it doesn't require any extra entities that need separate accounting and simplifies buying and selling, because property is free and clear. But if that gets me in trouble with self employment tax, I need to reconsider. 

Thanks for ideas.

Post: looking for a lawyer in the tampa bay area

Giedrius C.Posted
  • Investor
  • USA
  • Posts 12
  • Votes 0

Hi, I have the same problem. Have you found anybody you could recommend? Thanks!

Post: S-Corp reasonable salary and flipping

Giedrius C.Posted
  • Investor
  • USA
  • Posts 12
  • Votes 0

Linda, I answered your questions in my post and provided enough information to anyone who's familiar with the topic to give an answer. What's the point of the forum if an answer to most legal / tax related questions is "talk to the lawyer / CPA"? It's like telling someone who's asking technical question about his car in a car forum to hire a mechanic. That's not helpful to say the least. 

Post: S-Corp reasonable salary and flipping

Giedrius C.Posted
  • Investor
  • USA
  • Posts 12
  • Votes 0
Originally posted by @Lance Lvovsky:

@Giedrius C.

Ask your CPA. Seriously nothing in tax law is black and white and there are general rules, but in the end, if you want to sleep well at night, engage a professional.

That's not helpful, I wrote here because I'd like to hear from the ones who have particular experience in the matter either as CPA's or investors.