Today’s REI Classroom Lesson

William Bronchick talks about LLCs, S-Corps, and C-Corps and what works for different types of investors.

REI Classroom Summary

Choosing the correct type of entity to have your properties in is critical from a asset protection standpoint and also when considering tax status, as William Bronchick tells us.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Mike: Welcome back to the FlipNerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.

Bill: Hi, I’m Attorney Bill Bronchick, one of the REI Classroom instructors and host of LegalWiz.com.

Mike: This REI Classroom Real Estate Lesson is sponsored by UglyOpportunities.com.

Bill: Should I set up an LLC? Should I set up a corporation? If it’s a corporation, is it an S corporation? Most people start out their investments in their own name. Which is usually a mistake because of the liabilities involved and also because of the tax issues involved. If you do deals in your own name, you’re going to report on your personal tax return. Now, if you’re doing rentals, rentals are considered a passive type of activity or passive investment. You report your rental properties on what’s called a Schedule E of your personal tax return. And you pay federal income tax and state income tax if you have it on that income.

What you don’t pay is payroll or self-employment tax because it’s a passive investment. If you wholesale, if you flip, if you do anything that looks like earned income, like a broker would do, then it goes on Schedule C of your personal return. Which means you pay federal, state income tax, and self-employment tax, which can be quite a hefty number. Now, if you want to avoid that self-employment tax, then you’d report on a corporate return.

Now, when I say corporate return, I mean a corporation. A regular corporation such a C or an S. I’m not going to get into the differences in this video because it’s quite lengthy and you can talk to your CPA. Most people, when they set up an entity for real estate, they do an LLC. Now, an LLC doesn’t have a tax return. By default, if you’re the only owner, or you and a spouse, you’re going to continue to report as if the entity didn’t exist i.e. on your personal return rental Schedule E, flips, wholesales, etc. Schedule C.

While the LLC might give you some bit of liability protection from your activities or your business, it doesn’t give you any tax change. Which could be good or could be bad. If you’re doing a lot of ordinary income flipping and wholesaling, you’re paying the self-employment tax. The way to avoid that is to either, A, use a corporation or, B, have your LLC elect to be taxed as a C or S corporation.

Now, I said an LLC doesn’t have a tax return. By default, if it’s single member, one owner or husband and wife, you ignore the reporting and report on your personal return. If you’re two or more people, then you’re a partnership. You file a partnership return, but you can overcome those defaults and file as a corporation. So if you’re already doing single member, talk to your accountant, talk to your tax advisor about converting that LLC into either an S or C corp for tax reporting.

Now. it doesn’t mean that your LLC is not an LLC anymore. It still is an LLC and you still treat it as such. You’ve got managers, you’ve got members, you don’t have to do annual minutes and meetings and all that stuff like a corporation does. But for tax filing, you can be a corporation. I hope that makes sense and it also is going to save you a lot of money and headache coming down when it is tax time.

This is Bill Bronchick. I hope you can join this discussion on which entity you should use for buying and selling real estate?

Mike: HomeVestors the, “We buy ugly houses” folks, is a franchised system of hundreds of real estate investors that have purchased over 65,000 houses. If you’d like to learn more about the most powerful estate investing system in existence, whether you’re a pro looking to take your business to the next level or whether you have no experience at all but a burning passion to be successful in real estate investing, please visit FlipNerd.com/ugly to learn more.

Please note the views and opinions expressed by the individuals in this program do not necessarily reflect those of FlipNerd.com or any of its partners, advertisers, or affiliates. Please consult professionals before making any investment or tax decisions, as real estate investing can be risky.

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William Bronchick
William Bronchick, CEO of Legalwiz Publications, is a Nationally-known attorney, author, entrepreneur and speaker. Mr. Bronchick has been practicing law and real estate since 1990, having been involved in over 600 transactions. He has appeared as a guest on numerous radio and television talk shows including CNBC Power Lunch. He has been featured in Who's Who in American Business, Money Magazine, the Los Angeles Times and the Denver Business Journal. William Bronchick has served as President of the Colorado Association of Real Estate Investors since 1996.
William Bronchick

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