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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 13177
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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I live in Louisiana and am going to flip a house with my brother

Resolved Question:

I live in Louisiana and am going to flip a house with my brother in
Pennsylvania - he lives there. I am the financing partner and he is a
general contractor. We would like to know how to structure our
business dealings to minimize the tax burden. I am in a higher tax
bracket than he is. Essentially, we intend to split the profits 50/50.
Ideas we have considered are 1) I buy the house and hire his company
to do the work; 2) We form an LLC and buy together; 3) some other
arrangement we have not thought of yet. What do you recommend?
Submitted: 1 year ago.
Category: Tax
Expert:  Megan C replied 1 year ago.

MyVirtualCPA :

Thanks for asking your question! I'm sorry to hear about your tax issue and I'm going to try my best to help you understand or resolve it.

MyVirtualCPA :

If you buy the house, and hire his company to do the work, you will get the entire gain on the sale of the property and he will have income from the work done on the house.

Customer:

Are you saying this is the beast way to go?

MyVirtualCPA :

I think the best way is to buy in an LLC

MyVirtualCPA :

and split the profits

Customer:

Are there any drawbacks to this course of action?

Customer:

And what are the benefits of having an LLC?

MyVirtualCPA :

The benefits are liability protection for one

MyVirtualCPA :

There's really no drawback. It's the most common method to doing what you are setting up to do

MyVirtualCPA :

Another way to minimize tax is hold the property for at least 1 year

MyVirtualCPA :

This will put you in a lower capital gains tax rate ... 15% if you are in the 25% and up tax bracket and 20% if you make over $400K per year

MyVirtualCPA :

If you are in the 10 to 15% tax bracket long term capital gains rates are 0%

MyVirtualCPA :

If you do the LLC, you will have the same type of tax return as if you have no legal entity and split the profits...either way you fill out form 1065

Customer: Do I move money in and out of the LLC freely with no consequence? How do we determine the tax bracket of the llc if we have different ones individually?
MyVirtualCPA :

The tax bracket of the LLC is your tax bracket

MyVirtualCPA :

Your share flows to your tax return

MyVirtualCPA :

If you move money in and out, that will impact your capital account

Customer: Is my travel to and from something I just deduct from the profit of the sale?
MyVirtualCPA :

Yes, you can deduct your travel expenses...mileage, etc

Customer: Would it make sense to apply some of the profits of the sale to his income as the contractor? Can we even do that, since we are siblings?
MyVirtualCPA :

No, if you hold longer than one year you would have a favorable tax rate

MyVirtualCPA :

If you do pay him to do work, pay him at arms length and he will have income equal to what you pay him

MyVirtualCPA :

just like any other job

Customer: Probably don't intend to hold for one year due to the loan we'll need to pay off
Customer: Arms length?
MyVirtualCPA :

meaning you pay him what another non-related customer would pay

Customer: What did you mean by If you move money in and out, that will impact your capital account
MyVirtualCPA :

You have a capital account...which is what you have invested in the company

MyVirtualCPA :

you put money in, that adds to it. Take money out that reduces it

Customer: If we pay him for work, is that something we can do after the sale in lump sum, or something we need to do beforehand or even "as we go?"
MyVirtualCPA :

You can do whatever you want...as you go, or after the sale

MyVirtualCPA :

Is there anything else I can assist you with today?

MyVirtualCPA :

If not, please take a moment to rate my response "excellent" so that I may receive credit for assisting you today.

Customer:

Does the house need to be in the llc name or can it be in my name or does it matter?

MyVirtualCPA :

If you have the LLC it would be in the LLC's name

Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 13177
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
Megan C and 6 other Tax Specialists are ready to help you
Expert:  Megan C replied 1 year ago.
Our chat has ended, but you can still continue to ask me questions here until you are satisfied with your answer. Come back to this page to view our conversation and any other new information.

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Expert:  Megan C replied 1 year ago.
Thanks for allowing me the opportunity to help you. Please let me know if I can be of any further assistance to you in this matter. I really enjoyed working with you – please feel free to request me again when you come back to ask another question. Simply enter "MyVirtualCPA" in the subject of your question Thanks again for being a JustAnswer customer

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