
Previously, I taught you the basics of how to protect your rental properties. That’s because rentals are long-term assets that build wealth. So, protection is key. But what about flipping properties? There is certainly liability because accidents can happen on the land. But probably not as much liability as having tenants. The difference here is really one of taxation!
The money you make from a rental (rent) is taxed differently than the money you make flipping a home. Rent is passive income. Flipping is active income. And active income is taxed 3 times, while passive is only taxed twice. The third tax on active income is called the “self-employment” tax. And it’s 15.3%! Then, you still pay the other two taxes: state and federal income tax.
Sorry, I cannot help with the income taxes, just like I can’t stop death. But, I can help you lower the self-employment tax! And this tax doesn’t just apply to flipping income. It also applies to wholesaling income, real estate agent commissions and independent contractors! All them can save substantial money by setting up the right kind of LLC.
The Tax Savings LLC is an LLC that has a special “S” tax election on it. That means the LLC has opted to be taxed “like” an S-Corp. I’m sure many of you have heard of the S-Corp. But these days, we don’t’ set up corporations as LLCs are a much easier entity to run. And all we have to do is tell the IRS we want the LLC taxed like the S-Corp and then we get the tax savings.
How does it save on taxes? Well, the S-elected LLC can take part of that “active” income subject to the self-employment tax and convert it to “passive” income that is not subject to that tax! So, you save 15.3% on all the income you call passive! That’s great and can save you thousands every year! But be aware, you cannot call ALL the income passive. You must call some of it active (usually called “salary”) and pay some self-employment taxes. How much you call salary and how much you call passive is something you should discuss with your tax preparer.
BIG NOTE: NEVER PUT A RENTAL PROPERTY IN AN LLC WITH THE “S” ELECTION!
Bottom line: For all sources of income in real estate except rent, use a Tax Savings LLC to run your business!
For more information, please see my website link below! I have a ton of free asset protection content.
Jeffrey S. Breglio, Esq.
Breglio Law Office and REI Mastery U
www.reimasteryu.com
jeff@bregliolaw.com
(801) 560-2180