THE CASTLE KEEP ASSET PROTECTION STRATEGIES GARRETT SUTTON
Because Sammy has been flipping several properties a year, he is subject to ordinary income taxation. Since flipping properties is his business, it is how he earns his salary. This means he has to pay a 39.6 % tax( the highest federal income tax rate) on all his flips instead of only a 20 % capital gain tax rate for his long term holds( with a 3.8 % Obamacare surtax on income above $ 250,000 for married couples). Sammy definitely needs a CPA on his team for all the new rules.
This brings us to the best way to take title for Sammy’ s( and for your) flipping activities.
While in a large majority of cases, you will want to take title to your real estate in an LLC, for flipping you will consider using an LLC taxed as an S corporation. The reason for this, as with so many other things in life, has to do with taxes. Because flipping constitutes ordinary income, with the S corporation tax rules we can minimize payroll taxes( that darn 15.3 % extra tax we’ ll never get back as it falls into the dark hole of Social Security promises). Pay yourself a reasonable salary( and pay payroll taxes on that amount) and flow the rest through to you as a distribution( without payroll taxes). Be sure to work with your CPA on this to make sure you are taxed appropriately on your real estate endeavors.
2. Hold and keep. As Sammy analyzes each new property, he always asks himself whether it was one to flip or keep.
While he knows how to accelerate the return on his money by quickly flipping properties, he also knows that his longterm retirement needs would be in part satisfied by rental real estate income.
Typically, his ideal candidate is a duplex or 4plex that needs some repair. In such cases he can buy below market and perform improvements over time at his convenience. When he doesn’ t have a quick flip to work on, he keeps his crew busy on his hold and keep properties.
Sammy always holds his hold and keep properties in separate LLCs. He values the asset protection benefits of keeping his properties in separate entities, especially after suffering two lawsuits early in his career. The first lawsuit arose when he operated his construction business as a sole proprietor and held his first investment property, a duplex, in his individual name.