to use a corp or not for rehab
I am a newer investor. I have one house in my name personally. I plan to get it into a trust, and start an S Corp or LLC to hold my properties.
My strategy is mostly going to be buy and hold, but I do want to do a rehab at a time for fun. I am bidding on a rehab now that I will live in.
My question is, should I (1) purchase it in my name to take advantage of the 1031 exchange when I sell and move to my next rehab, or (2) purchase it in my new corporation's name so that my expenses are tax deductible as business expenses. And if I do, will my corporation be deemed to be a dealer by the IRS?
rottzilla,
You want to purchase a rehab that you will occupy as your primary residence. You want to know which business entity would be best to hold title for this property. I assume that you are concerned about the tax sheltering advantages for each ownership entity.
Usually, rehab costs are added to the basis of the property and are not deductible as expenses. You are not allowed to "charge" for your time and labor either -- only the cost of materials for work you do yourself is allowed. In this context, I believe the title holding entity is irrelevant, but, I will defer to Taxjunkie for the answer to this question.
In the meantime, I believe the business entity question has been thoroughly discussed in the Legal Forum, Property Management Forum, and even perhaps in the Beginner's Forum, so, you may find an answer there which fits your circumstances.
Furthermore, I suggest that you consider another option. Occupy the rehab as your primary residence for two years, then when you sell it, the profits (up to $250K) are tax free.
Since a primary residence is not allowed to participate in a 1031 exchange, take advantage of the capital gains exclusion on the sale of a primary residence to avoid capital gains taxes altogether. You can repeat this strategy every two years for tax free profit.
Dave, thanks. You confirmed what I was thinking. I belive that will be better (the 1031). After all, any repairs I do will add to the equity. Therefore, not only will I get a capital gains free sale, but a gain based on the work I've done.
I have read that opening a S Corp is preferable for rehabs. I really didn't see how it would be as it will be my primary residence.
Thanks again!