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 .