Are you wholesaling real estate under your own name?
I'm going to show you a better way
to structure wholesaling business to avoid negative tax implications.
And protect your.
Assets in case a deal goes south.
If you want to learn.
More about how to properly structure all of your real estate investments
and protect your assets, you can register for our Tax.
And Asset Protection Live event at the link below.
Right now I'm going to show you how to set up your wholesaling business
so you can protect yourself and have more control over your deals.
So let's address this upfront.
There are two problems with wholesaling properties in your own name.
One of them is going to be tax and the other one is going to be liability.
So what does that mean?
Well, from the liability side, it's pretty straightforward.
If you were to go out there and I'm going to find a property.
So here I am as a wholesaler.
And I'm going to get this property tied up.
Under contract with this seller over here.
And I'm going to enter into a contract with that seller.
To buy this property. And then I'm going to go out here.
I'm going to try to find an investor that I can flip that contract to.
Now, most people think that when. You're buying.
Real estate, that is when you enter into this.
Agreement here. The most you stand to lose.
Is your earnest. Money.
So, for.
Example, if I had to put down $1,000 on this deal
and I don't close or this investor.
Over here that.
I sold. My agreement to.
Fails to close the most year out as $1,000 was a wholesaler.
What you need to appreciate is that.
These are contracts you're signing here.
And when you. Enter into agreement to buy a piece of.
Property, yes, it. Has earnest.
Money that goes down,
but that is not the only remedy that is available to the seller.
If you fail to close.
And what can happen in certain wholesale deals is that you flip this deal to an.
Investor, let's say I bought your deal. From you.
I look at the property and then I run into financing issues
that I don't have the money to close, so I just walk away from the deal.
Yeah, I lost some money that I paid you and I didn't close on this property.
Well, that.
Seller, because the seller tied up their property.
You know, let's say it's for.
30. Days, maybe you got an extension on it.
So it's 60 or 90 days.
The value of the property has gone down that seller.
Can turn around and. Sue and they're not going to. Sue.
The person that you.
Flip the deal to, they're going to sue you because they had your name on.
The agreement with them. You're the.
One that entered in. That agreement. So you have liability.
So that's a problem that you need to work around.
You don't want to wholesale in.
Your own name because you have personal liability there.
Trust me, I've seen it happen before.
I've had people send me letters from the law firms threatening to sue them
because they did not.
Close on a property that they were trying. To wholesale.
Now, that's the liability side, the tax side.
Well, that's a whole completely different animal that we need to.
Be concerned about, because when you're.
Wholesaling with real estate
in your own name, you're going to be treated as a sole proprietor.
All of the income you generate from your deals.
This is going to be what we call active income to you.
So that means you're going to file a Schedule C.
On your 1040.
Which means it's going to be subject to 15.
Point 4%. Employment, taxes on every dollar.
You earn up to about one.
Hundred and $20,000.
So as a wholesaler, I don't want to be stuck in the situation
where I'm having to pay too much in tax on my deals.
I want to find a solution
that allow me to cut my taxes, especially my employment taxes.
This is what. We're. Looking to minimize.
So if you're going out there to to
to wholesale real estate, you got two problems right off the bat.
You're going to pay way too much in. Tax if you're doing your own.
Name and you're going to get hit with liability should a deal.
Not come through.
Now, the next issue that comes up, a lot of times
that people are going to wholesale properties, they want to know
clincher I use a limited liability company or should I use a.
Corporation for.
My wholesaling business?
Well, that's really going to depend on a multitude of different.
Factors when we're trying to figure out.
Which entity we're going to use.
Now, for instance, a limited liability company right here,
the unique thing about an LLC is that you can choose how you want to.
Treat it for federal tax purposes.
That is, you can treat it as a C corp, which means it's going to file taxes
and its own.
Tax rate, which is currently 20, 21%.
You can choose to have it created as an S corporation.
Which is a. Flow through.
Now, you would never choose to treat this.
Entity as a.
Disregarded entity or a partnership for federal tax purposes.
Because that puts you back into the initial problem.
I stated with tax planning that if you do it as a.
Sole proprietor.
You'll be treated as a sole proprietor with those two elections.
So we're going to stick with a C or an S.
That's how a lot of people will.
Set up their. LLC.
Or you could set up an INC or a traditional corporation,
and with that you have the election you can go see or s status.
For your traditional corp.
So the question really becomes which of these two structures should you.
Use if you're going to be. Wholesaling?
Now, a lot of people, they just go for the LLC
because so many practitioners out there will tell you
it's set up a limited liability company, everybody does it and there are some
benefits to setting up a limited liability company for your wholesaling business.
The Chief two benefits
that I can think of that come to mind is that with a limited liability company.
You have protection not only from.
What happens on the inside.
So for example, if my LLC entered.
Into an agreement to buy.
This piece of property and I and my investor didn't close.
The creditor, the seller would.
Only sue the LLC and. Not me personally.
So that's a benefit.
The other benefit you have with the limited
liability company is that here you. Are down here as.
The. Member of your. LLC.
If someone sued you personally, depending on where you set up that LLC,
well they wouldn't be able to take your limited
liability company from you because hopefully the LLC.
You're creating has what we call charging order protection.
So your business. Offers you.
Protection from what happens on the inside and from what happens on the outside.
So this. Makes it a very popular form from an.
Asset protection standpoint to use for wholesalers.
The other benefit of using the LLC is that
it's much easier to run.
You don't have to have annual meetings and things like that
when you're running a limited liability company, which you do if you.
Set up the traditional corporation.
So the traditional. Corporation.
The problem that many people have with using a traditional.
Corporation, the.
Wholesale running, wholesaling business.
Is that it's a lot of crap you got to work through, right?
Each and every year
you got to have a directors meeting, you have to have a shareholders meeting.
You have to remember to do.
This because if you don't do this, then it gives someone that.
Sues your company.
Ability to what we call pierce the veil of that business entity
and go after you and and sue you individually.
So that's a drawback.
Now, what's a positive of using a traditional.
Corp versus.
A limited liability company?
Well, here's the benefit of using an egg.
Let's say that you're going to go out there and you're going to spend,
I don't know, make an investment of 15, $20,000.
To learn how to get started in. Wholesaling.
A lot of people do that.
They'll invest in education.
Now the benefit of having a traditional INC is that if you make that type of.
Investment, if you're getting trained by. Someone, if you have.
If you're going to hire a coach to walk you through your business,
I would encourage.
You to look at a traditional INC because if that business.
Doesn't work out for whatever reason.
Let's say you run it for. A year and you.
Just can't get any deals. Under contract or.
You just can't flip them. Do an. Investor.
And you've invested into getting this.
Business started 18.
Thousand dollars right and education and coaching expenses.
Well if you started with a traditional INC,
then we could close that business down and you could pick this
$18,000 up as a tax deduction.
On your 1040. You can write it off.
That deduction I just share with you is only available to a traditional INC,
the LLC.
You can't do that.
You can.
Take a portion of it. $3,000. A year, but.
It's going to take you six years to write it off.
Whereas if you done.
With a traditional corp, you could write it off in year one.
So that is a positive.
And so if I'm looking at someone and they're saying,
do I set an LLC up for my wholesaling business or.
Do I set up a corporation?
My first question is.
Going to be,
how much are you investing in yourself to get started in this business?
If it's not very much, go with the LLC.
If it's a lot, I would go to traditional INC.
Now, once you've got that nailed, then you have to determine how.
Am I going to trade it for for.
Tax planning purposes.
Now when it comes to running a wholesale business,
I wouldn't necessarily set up or make an election to treat it as an S.
Corporation for. My wholesaling business.
Why don't I want to make an selection for my wholesaling business?
Because when you make an S election, what it means, it's a flow through.
So if I had an LLC.
Set up here treated as an S corporation.
And my. Business brings in this year.
$100,000, now that
$100,000 is going to flow down and be taxable to me individually at.
My tax bracket.
Let's say my wife's out. Here working.
And she's making 200 K.
I bring in 100 K now our income.
Is $300,000.
So it's going to push us up into.
A higher tax bracket. With an S. Corporation.
You don't have any control. Over your income.
Everything flows down to you and you pay taxes on.
All of your earnings.
If you want to have control
over your income that you're generating from your wholesaling business,
then I would strongly suggest that you should look at setting up a C.
Corporation.
The thing about a C.
Corporation. Is twofold.
So when you set up a business, say
we'll just go traditional INC right now and I choose the C.
Corporation tax status.
Here's the first. Benefit.
If I make $100,000, it's going to be taxed at 21%.
So on my 100.
Thousand dollars.
In this example, I have $79,000 left.
Over after. Taxes.
Now, I'd be wondering.
Well, Clint, if I want to take it out, am I going to have to pay taxes again?
Yes, you will if you pull the money out.
But if you're going
to leave the money in the business, because let's say you want to start
getting started in flipping real estate, because wholesaling tends to be
one of those activities that. People start with.
And then they. Branch. Into other into flipping.
I mean, that's the way. I got started, went from.
Flipping, and then I went into acquiring residential real.
Estate. So if you want to have more.
Capital.
Left over to.
Invest in in flipping real estate, the C.
Corp is going to be your better.
Bet than an escort because the Corp.
is going to push it down to you and possibly taxed at.
A higher rate.
Now, the other benefit, how does a.
Corporation impact your.
Ability to borrow money?
Because when you transition out of wholesaling and you start buying property.
Of course you're going to start working with.
Lenders and using other people's money.
The thing about using the corp.
A C Corp that is rather than an escort or flow through entity.
Is that that income doesn't hit your tax return.
If you don't want it to.
The the other aspect about it is that when you're using it, say.
An S corp or a flow through.
Those things kick off what is called ak1.
And so this K one is attached. To your 1040.
So when you go in to, to, to borrow money from a bank and the.
Underwriters look at your ten.
40, what they're going to see is that you have this k one
from a an LLC that you set up as an S corp.
The next thing you want to know is, Hey, tell us all about your S corp.
What does it do?
How much you didn't come? Is it generating for you?
So when you're using a C. Corp.
It's not a flow through.
So you do not have K ones with C corporations.
The underwriter that's.
Looking at your 1040 would not even know that you have a business
on the side that you're running.
All they're going to see is the income that you report on your taxes.
So if I had a C.
Corp here that I was running for my.
Wholesaling, what I would do is set myself up as an employee,
pay myself a W-2, which lenders really love.
W-2 wage earners
pay myself a W-2 and then have that W-2 show up on my 1040 and make no
there'll be nothing.
On my return that. Shows I have my own business.
Over here on the. Side.
So from that standpoint, I think that the C Corp
has other benefits as well that you couldn't get if.
You were to set up an S corporation because of that flow through treatment.
Now, the other thing.
To consider when you're entering into a wholesale agreement
is whether or not your purchase and sale agreement.
With the. Seller permits. Assign ability.
Now what does that mean?
It means that you can assign.
That agreement to a third party.
So if I have my my corporation here set up
and I enter into an agreement with the seller to buy.
This piece.
Of property, and I have this investor over here that.
That I want to kick the deal to to put them in connection with.
That seller.
That purchase sale agreement.
Has to be assignable.
Now, in certain states like Texas, for instance.
All contracts are assignable.
But in other states, the seller.
May have a purchase and sale agreement that does not permit.
Assign ability because
they don't want you taking that deal and kicking it to someone else,
because then what they did is they left too much meat on the bone
and they're thinking, hey, you're going to profit from my property.
I think not.
So if you're working with a seller that does not allow
for assign ability, then what you should look at doing when.
You're marketing your.
Wholesale deals is.
Choose a different entity.
What I like to do is I'll possibly set up a land trust
or maybe even a limited liability company that's owned.
By my corporation.
And now when I when I enter into these deals.
Rather than have my corporation enter into the purchase and sale agreement, I'll.
Have my land trust or what I like to use is called a wholesale trust.
Here at Anderson, we created a very. Specific wholesale.
Trust agreement.
To do these deals. It's similar to a land trust.
And the reason I use land.
Trusts is most
people are familiar with that tool, but really it's a wholesale trust.
And then what happens with this is that when you find this individual.
Over here, the investor.
You'll kick them the trust and they'll step in to the trust.
And now it doesn't matter if there is a prohibition on a sign.
A building your purchase and sale agreement.
Because you're moving the trust to the investor.
So whoever owns.
That trust can then close on that property.
And that's one way you get around those situations.
Wherever the contract prohibits.
Assignment of the agreement, fine.
I'm using a wholesale trust in my deal.
The reason. Why I created the wholesale trust for Anderson.
Was because we were running into issues with our clients that had that concern.
They said the seller won't allow signed ability, even though I.
Tried to get it worked in there or the.
Seller wouldn't allow innovation clause. Okay, great.
Use a wholesale trust.
Now here's there's some great ways here in which to set up a wholesale business.
If you want.
To learn more, I want to invite you to our tax and asset protection.
Event.
Listen, if you're a real estate investor
and you're considering getting started in real.
Estate investing or you've been investing for a while and you want to.
Learn more about.
LLCs and Land Trust and Wholesale Trust.
In corporations.
And and how they can be implemented from a liability and business
planning standpoint.
You're going to learn that at our Tax and Asset Protection Workshop,
if you want to learn more about taxation, how you can use real estate
to greatly reduce your taxes, you're going to learn lot about that as well.
But more importantly, we're going to show you how to build a business around.
Your real. Estate investing and what's so unique about.
This workshop, which brings people to. It.
You know, we typically have 1000 to 2000 people on our.
Workshops when. We host them.
Is that when you come
there, you're going to be able to get your specific questions answered.
That is, we have a.
Team of professionals, attorneys.
And tax professionals that will be on this event with me.
Why I'm speaking. Answering your.
Individualized questions.
So if you're wondering about real estate and asset protection, you want to get you.
Want to learn more.
Listen, click on the link, get to this event, and that's.
Where you're going to get your questions answered.