A lot of people are finding it lucrative right now to get into the business of buying real estate at very cheap prices and either flipping it immediately (wholesaling) or fixing a flipping. One of our students, Speed, as the following question that is fairly common among flippers:

Q: My brother and I set up an LLC to buy bulk REOs and resell them with 15yr land contracts to the new homeowner. We want to keep some of the contracts for cash flow and purchasing more REOs and we want to sell the remaining contracts to create more cash for more REOs. Can you help me understand how these are taxed within our business both the ones we keep and the ones we sell off at a discount? Anything else we should know tax wise in setting up our business and trying to scale it? Thanks.

A: Flipping is a business, so you need to treat it like any other business from a tax standpoint. This means that income will be subject to Self-employment tax if it comes through a general partnership (or LLC taxed as a general partnership) or through a sole proprietorship (or LLC taxed as a sole proprietorship). In your case, you probably want to form an LLC taxed as an S corporation.

However, before setting up your LLC, be sure to meet with your tax advisor to create a comprehensive, permanent tax strategy. While S corps can be great, they can also be very harmful. For example, in your case, if you decide to hold and rent some of the prime properties, you can get in trouble with an S corp.

For more on S corps and how to use them, see our course on Getting the Most out of Your S Corporation at http://www.provisionwealth.com/products. For more on how to formulate a tax strategy, call our office at 866.467.5809.

Warmest regards,

Tom

P.S. - Regarding your final question - number one answer is to form a team including a great team of advisors, such as a tax strategist, wealth strategist, attorney and banker.