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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 can’t 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
real estate
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 2008
mileage deduction is 50.5 cents per mile. Check with your accountant to determine which
method will work the best for you.
If 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 resides on.
A small business can write-off a little
over $100,000 in personal property purchases
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 can’t 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 can’t 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.
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