If you are in the business of flipping
properties, you should consider incorporating
or setting up a Limited Liability Company (LLC) to protect
your personal assets. In both a corporation and a LLC, members or
stockholders canít be held personally liable for business debts and
lawsuits against the business. They can only be held liable for
business debts if they personally guarantee the debt. If the
business is sued, just the assets of the business are at risk, not
the personal assets of the members or stockholders. Note - The
owners of a limited liability company are referred to as members.
You can reduce your sales commission expenses
by obtaining a
salesperson license or a real estate broker license.
Real estate commissions can take a big bite out of your profits.
For example, on a $300,000 property with
a 5% sales commission, it will cost you $15,000
to sell your flip property. Even if you only get a listing
commission, it will help your bottom line. A real estate sales
license will give you access to the multiple listing service
database where you can locate the selling price of recent sales of
similar properties in the area that you are doing your flip.
This information will help you to estimate your potential profit.
Keep detailed and organized records
for each property that you flip
including receipts documenting improvements and miscellaneous
expenses, bank statements, transaction settlement documents, etc.
that corroborate all costs affiliated with the purchase, renovation
and sale of each property that you flip.
Be sure to keep track of all costs associated
with starting up your flip business.
Business start-up costs
are considered capital expenditures and they include any expenses
that you incur before you actually begin doing business. The
IRS allows you to write-off start-up costs over your first five
years of operation.
You can write-off
miscellaneous business expenses
including wages and salaries, materials, supplies, business related
educational expenses, business insurance, business utilities,
business property taxes, business legal fees, accounting fees,
business interest expense, business rent, advertising expenses, 50%
of business entertainment expenses, business travel expenses,
postage, business charitable contributions, bank service charges,
business gifts, business related magazines and books, business theft
losses, business consultant fees, real estate commissions
on the properties that you flip, purchase and
sale closing costs, business seminars, trade shows, business
internet access, etc. If you are unsure about the
deductibility of a particular expense, check with your tax advisor.
When you have your flipping business up and
going, you can write-off your automobile expenses in
one of two ways. You can keep track of all actual automobile
expenses that you incur or you can keep track of all miles driven
for business purposes. The 2012 mileage deduction is 55.5
cents per mile. Check with your accountant to determine which
method will work the best for you.
purchase a building for your flip business, you can
write-off your interest expense, utilities, insurance, property
taxes, supplies, repairs, maintenance, depreciation, etc.
Commercial buildings are depreciated over 39 years. Only the
building can be depreciated and not the land that the building
A small business can write-off a little over
$100,000 in personal property
in the year of the purchase. Qualifying Section 179 Property
includes office furniture, office equipment, business software,
computer equipment, equipment used to renovate your flip properties,
etc. Automobiles are not considered Section 179 property.
Consult with your accountant to determine which assets you can
write-off in the year that you purchase them and which assets you
will need to depreciate over a given number of years.
You might want to
establish a home office to perform business administrative
activities. You can write-off office equipment, office
furniture, business postage, business software, office supplies,
etc. You can also write-off a percentage of your utilities,
mortgage interest, property taxes, security system, garbage pickup,
repair and maintenance costs, house insurance, depreciation, etc.
Go over your potential home office deductions with your accountant
to make sure that you comply with IRS guidelines.
Set up a 401k or Simple IRA
to reduce your tax liability. If you have no employees and you
utilize contractors to do all of your flip property rehab work, I
would highly recommend setting up a solo 401k. Your solo 401K
contributions reduce your state and federal income tax liability and
your self-employment tax liability. If you are under 50 years
old, you can make a personal contribution of $15,000 and a
business contribution of 20% of your business net income. Your
total tax-deductible contribution canít exceed $44,000. If you
are 50 or older, you can make a personal contribution of $20,000 and
a business / employer contribution of 20% of your business net
income. Your total 401K contributions canít exceed $49,000.
The business portion or employer portion of your 401K contributions,
the 20% of your net profit, will reduce your federal income tax
liability, state income tax liability and self-employment tax
liability. As mentioned above, the self-employment tax rate
is15.3%. Your personal 401K contributions will reduce just
your state and federal income tax liability. Maximize your
employer contribution first. Note: You are not allowed
to deduct the interest paid on money that you borrow from your 401k
account as a business expense.
If you have employees, setting up a 401k will be expensive.
You will be required to set up a 401k for each of your employees and
to contribute to their accounts also. You might want to check
with a retirement account specialist if you have employees.