Susie, one of our School of Tax Strategy members, asks the following question:

Q: I have started a Real Estate Investment business in the state of Texas. Myself and my husband are the only two members. I am completing the SS-4 (Application for Employer Identification Number)I have set up an LLC, but am unsure of what I should put for type of entity. For the best tax advantages, should we be a Partnership or a Corporation. If a Corporation, what form number needs to be filed. Thank you very much Tom. And, by the way, I am enjoying your program and look forward to getting through all of it.

A: The answer to your question depends on the type of real estate investing you are doing. If you are fixing and flipping, for example, you should use a different entity than if you are buying and holding property for rent.

Let's look at the buy and hold question, since that is the one we can answer here. If you are fixing and flipping, please call my office at 866.467.5809 and ask for a tax evaluation. Fixing and flipping is a business and requires additional information from you before we can give you an acurate answer.

Typically, not always, the best entity for rental property in Texas is a limited liability company that is either taxed as a sole proprietorship (if there is only one owner) or a partnership (if there are two or more owners). The reason for this is that it's much easier to get money in and out of a sole proprietorship or partnership than a corporation AND there are some serious negative tax benefits to owning real estate in a corporation. That said, remember that in 2012 we get a new Medicare tax on net rental income. This tax will apply to you if you have net income from your rental real estate (which you should not with a good tax and wealth strategy) and your total net income as a couple is over $250,000. The tax rate currently is 3.8%.

The best answer to all entity structure questions is a comprehensive tax strategy. Please contact us at 866.467.5809 or cs@provisionwealth.com to learn more about getting a personalized tax strategy for your business and investing activities.

Warmest regards,

Tom

One of our School of Tax Strategy members, Nancy, asks the following question:

Q: As a Realtor who has one independent contractor and one part time employee working for me, what are the differences between forming an LLC and a Sub Cap S?

A: The general rule is that LLC's are great for businesses. LLC's can be taxed any way you want them to be taxed. They can be taxed as sole proprietorships, partnerships, S corporations and C corporations. You simply make an election. S corporations are good for a primary business because they are easy to operate and, done right, can reduce your self-employment (FICA and Medicare) taxes. So, I like to see LLC's that elect S corporation status most of the time.

There are times when you won't want to be an S corporation, such as when you are just starting up and have losses or when you need some flexibility with other owners. We have a great course on when and how to use S corporations at http://www.provisionwealth.com/products.

By the way, we have a School of Tax Strategy call tonight. Be sure to join in if you are a member. If you are not yet a member, call my assistant, Jessie, at 866.467.5809 and she can get you signed up.

Warmest regards,

Tom