Karla Dennis and Associates, Inc. receives hundreds of questions every week. Although we can give specific answers without knowing specific facts, we want to share common knowledge regarding taxes, real estate, and business. One of the most common questions we receive is all about entities. When you are flipping properties, how should you treat that real estate? Read on to learn more:
If you are flipping properties, we recommend for you to flip it inside of an S-corp.
- Why do we say an S Corporation? When you flip properties, your properties are considered inventory. That’s no different than you owning a clothing store and selling clothes out of your clothing store.
- In this particular case, your inventory is actually real estate, so when you are flipping property, that’s an active business, and those businesses drive self-employment tax.
- So if you are flipping inside, for example, an LLC, you’re going to drive self-employment tax on top of income tax automatically. Therefore, we are always going to advise clients to flip inside of an entity if you can.
One of the main reasons we recommended this step is due to liability. From our experience, we have seen many flippers being sued due to issues, and to protect yourself, you want to make sure to be in an entity. If you manage your property, that is something else you want to think about.
Have a plan for every property:
Where are you holding this property, and why? For example, Karla herself has a whole real estate portfolio. She has specific properties that she knows will be properties she will hold on to for generational purposes and pass down to her family. She would like to sell properties when the market is right and probably use a 1031 for something else. You need to know your plan for each and every property, so you know where to put it and how to handle it.
If you have more questions regarding this information or want a more detailed view of your business venture, speak to our team. We offer free consultations, and look forward to helping you!