Setting up an S-Corp and LLC, take a look at this package

[mcwagner]

you don't have to limit yourself to 1 property per.  I don't recommend that (overkill).  just be aware that EVERY property in an LLC is at risk to liability arising at any ONE.

1031 defers taxes until the 2nd sale.  DaveT can answer that question better than I.

[rkim777]

First a disclaimer:  I'm not an attorney or an accountant.  Be sure to verify anything I, or anyone else, post with reputable and practicing professionals in any respective field in which you have questions.

For what its worth, from a federal tax viewpoint (IRS), a single-member LLC or S-Corp is treated as a sole proprietorship.  I think it is the same from a legal viewpoint so if you do form these entities, you might not want them to be single-member but have a partner or any lawsuits could go right through these entities and go after your personal assets if they are single-member entities.  Regardless, your first and best line of defense against lawsuits should be insurance.

Don't overthink the plumbing.  First look into what you might have to protect yourself from.  For example, I know of someone who purchased a $5500 asset protection kit who hasn't done even a single deal and he lives in a state where the maximum judgment against what he fears is only about $20,000, not the millions of $ he is trying to protect himself from.

$5000 seems to be an excessive fee just to form two corporations.  I'm not sure where you live but it is probably best to incorporate in the state you will do business in.  The most important parts of your corporations will be the operating agreements (this is also what the attorneys will charge the most for to form your entities).  Be sure that your operating agreements have the "revenge clause" to address charging orders in case someone wins a lawsuit against your corporation(s).  This revenge clause acknowledges that the plaintiff is entitled to proceeds but that it is up to the discretion of the manager (you) to distribute them.  This means that you don't have to distribute any proceeds but the plaintiff still has to pay the taxes on them.  I love that clause. Email me if you want a template of this clause from my operating agreement.

[Dave T]

Also If I use LLC to flip properties, and use 1031 exchange what tax bracket would that fall into ? thanks for all your help.

machismo,

Property flipping is an active income activity.  The property you are flipping is merchandise (inventory) to your business -- not property held for investment use.  You are acting as a dealer to real estate and your flip property is not permitted to participate in a 1031 exchange.

Your flip profits are ordinary income to your business.  Depending upon how you elect to have your business activity treated for tax purporses, both ordinary income taxes and self-employment income taxes could apply.

[mcwagner]

Texas (and other states I'm familiar with) allow single-member LLC's with the same liability protection as multi-member LLC's.  It's codified (written in to the law) and you can read it yourself.  It's pretty self-explanatory.

http://www.capitol.state.tx.us/statutes/bo.toc.htm

The LLC is taxed as a sole proprietorship by default, but you can choose to tax the LLC as a corporation or S-corporation.  this makes it a full-fledged Corp or S-corp as far as the IRS is concerned.

And your first and best line of defense is to not do stupid stuff that creates or inflates risk.  Fix the loose board, make sure the lock works on the gate, etc.

[rkim777]

Thanks for the heads up, Mark.  I'll leave it to the experts like you to tell the facts.  Here in South Carolina, I was informed by my attorney that the single-member LLC is pretty much worthless for asset protection.  Depends where the original poster will do business and incorporate.

The only reason I said that insurance is the first and best line of defense is I cannot control what contractors, kids who wander onto my properties, or others do when I'm not present.  Yes, I can prevent myself from doing stupid things but I cannot prevent others from doing so and suing me for their own foolishness and therein lie the biggest risks.

[machismo]

machismo,

Property flipping is an active income activity.  The property you are flipping is merchandise (inventory) to your business -- not property held for investment use.  You are acting as a dealer to real estate and your flip property is not permitted to participate in a 1031 exchange.

Your flip profits are ordinary income to your business.  Depending upon how you elect to have your business activity treated for tax purporses, both ordinary income taxes and self-employment income taxes could apply.

everyone all your post are very helpful, but I think I am getting more lost as what I should do, anyone know a good professional in Austin area to get help regarding this.
As dealer status seems like an area very debateable, and onus on taxpayer to prove to IRS otherwise, its best to leave it to professional. I wonder if 4-5 flips a year would get you a dealer status ?

[Dave T]

machismo,

There is no such thing as "dealer status".  The IRS does not confer "dealer status" after you have done some magic number of flips.

Instead, the IRS looks at each transaction you complete to determine whether a dealer disposition has occurred.  If so, then you have acted as a dealer to real estate for that transaction and the appropriate tax treatment will be applied.

If you are flipping property, then you are acting as a dealer to real estate, even if you do only one.  

[machismo]

So a rehabber or flipper can never escape the "dealer status" ? how do so many flippers manage to have their profits getting washed way in huge tax cuts ?