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.