LLC and Tax Questions for Real Estate Investors

Uncategorized Jun 05, 2023

In today's blog post, I'm gonna share my thoughts on LLCs, specifically when it comes to wholesaling real estate. 

One of the most common questions that I get is whether or not you should set up your LLC before you start wholesaling real estate.

And while what I say here today is based on my own research, my own experience, and my conversations with my CPA, I am not a financial advisor.

And so anything I say here should not be taken as personal financial advice. You should definitely consult a professional for that.

There are a ton of different ways that LLCs and other business entities can be utilized for wholesaling.

If you're not familiar with what wholesaling is, it's the process of getting a property under contract with a motivated seller and then selling or assigning that property to a cash buyer for a fee.

There are different rules and regulations depending on what state you're wholesaling in.

We'll talk about whether or not you actually need an LLC to get started wholesaling, as well as the number one downside to getting an LLC.

And if you still decide to move forward we'll discuss the pros and the cons, like the tax benefits as well as the annual LLC maintenance fees.

So first things first is it possible to wholesale without an LLC? Yes it is.

It is very much possible to wholesale in your personal name. 

Maybe it's not the most business savvy or tax-efficient strategy, but it is possible.

Whether you're assigning the contract or double closing on your deal, you can go under contract in your personal name, wholesale the deal in your personal name, and when the title company cuts you a check, it'll be in your personal name.

Deal done.

So why do so many new wholesalers agonize over this decision of whether to get an LLC or not before ever even getting started and doing a single deal?


The Three Phases of Achievement

I think that this focus on LLCs and things like that tie into “the three stages of achievement.”

This is an idea that I first learned by watching productivity YouTuber Thomas Frank, and then I've kind of adjusted it to my own thinking about wholesaling and real estate investing in general. 

The three phases are as follows: phase one is gear acquisition, phase two is learning and education, and phase three is deliberate practice.

When we first get interested in something, we spend a lot of time in phase one, gear acquisition.

This was the phase my guy Calvin Cambridge from Like Mike was in the entire movie. He was singularly focused on the gear, on the shoes to make him like Mike.

This is the same thing when we pick up something like playing guitar. We've got to get a guitar, we've got to get a mic if we're going to sing as well, a pick, and an amp. 

The gear that is associated with doing that thing.

And with wholesaling, we obsess over gear like dialers, VAs, driving for dollars apps, and LLCs.

Most people spend way too much time in this first gear acquisition phase and also spend too much time in the second learning phase.

Hours and hours spent watching YouTube videos and reading articles can be a good thing at first, and I've tried to make my YouTube channel a great place for beginners to go to get started and get that information that you need.

But at some point, if that's all you're doing then you may get stuck just bouncing back and forth between phases one and two, stuck in analysis paralysis, and never actually get to phase three, that deliberate practice where you're taking action and making things happen.

This is the problem that I see with the LLC question.

Just having an LLC doesn't do anything for you, especially if you're not out there talking to motivated sellers making offers on distressed properties and learning through action.

I've talked with many people who say things like, “I'm about to get started making offers, I've just got to get my LLC set up.” 

Or even worse, when I ask “Hey, how's your wholesaling business going?” they say, “Great, I got my LLC set up,” and that's it.

Again, just having the LLC but not actually doing any business with that LLC doesn't do anything for you.


Two Basic Recommendations

So I've got two basic recommendations for you.

First, if you don't have the money to get an LLC set up, wholesale in your personal name and take some of the profits from your first deal, reinvest them into working with a CPA for a half an hour consultation, get your LLC set up, and you're on your way.

Or, if you have the money to invest in an LLC right now, give yourself two days - yes, just two days - to get everything set up.

The first day is going to be spent doing a 30-minute consult with a CPA who can give you the legal professional advice you need that's personalized to your situation and the state that you're going to be wholesaling in. 

Then, on the second day, you're going to apply everything that you learned and file all the paperwork needed to set up your LLC.

The goal here is don't get stuck.

You don't want to wait days or weeks or even months saying, “I'm gonna set up my LLC before I get started,” and then time passes and you just never do it, and you never take any action to actually getting a wholesale deal.

Setting up your LLC is actually a very small part of your business, so pick up the phone and call around to find a CPA where you can afford 30 minutes of their time.

Take their advice, invest in yourself, and just go ahead and get everything set up.

So with that advice out of the way, let's talk about some of the basics that you might want to know before you actually have that conversation with a tax professional.

First, why do people set up LLCs in the first place?

The first reason is for liability protection and the second reason is for tax benefits.


Liability Protection

First, let's talk about the acronym itself.

LLC stands for “limited liability company” and it's supposed to limit the amount of liability that you as the owner are exposed to.

For example, let's say that you wholesale a property through your LLC and somebody sues you.

In this case, if you've done everything correctly (and we'll get into that in a moment), there's supposed to be some protection between the assets that the LLC owns and your personal assets.

So if somebody's suing your LLC, they would only be able to take the assets that your LLC owns and not things like your personal car or your personal house.

This is called “the corporate veil,” but it's not like some automatic iron-clad protection.

Although the LLC technically gives you the protection of this corporate veil, it is a big “technically” because there are certain things that you have to do to maintain this protection.

This is going to be things like keeping separate bank accounts for your personal money versus the business money, paying your annual fees on your LLC, having the correct insurance, and other things as well.

A lot of times, wholesalers aren't concerned with having an LLC because they never actually own the asset.

They might go under contract to purchase the property in their personal name, but before closing day comes they sell that contract to another investor and they're just collecting an assignment fee. 

But they never actually owned the property itself.

LLCs seem to be more common amongst investors who are actually going to own the property, whether they're going to keep it as a rental or they're going to fix and flip it. 

This way, if a tenant or a contractor gets hurt or something happens while they're involved with the property, they can sue the LLC and the assets that the LLC owns. But they're not actually suing the owner of the LLC for all of their personal assets.

Now that said, the U.S. is the country with the most people trying to sue each other in the entire world.

And so maybe getting some legal advice from a tax professional setting up an LLC might protect you in the case that you wholesale a deal and someone tries to sue you for something that happened during that process.

Tax Benefits

The second most common reason people get an LLC is to take advantage of tax benefits.

But in my experience working with my own CPA, these tax benefits probably aren't as big as you would think, especially not right off the bat.

If you open an LLC for your wholesaling business, you might be able to write off certain business expenses which would lower your taxable income. 

Again, I'm not a tax professional, but just a basic example might be something like you make twenty thousand dollars in your wholesaling business but you spent five thousand dollars on marketing, skip tracing, and bandit signs. 

Well the LLC might be able to write off that five thousand dollars you spent as a business expense, which would lower your taxable income from $20k to $15k and so you would pay less taxes.

In my “not a tax professional” opinion, that's how it might work.

So these write-offs could definitely be an advantage to having an LLC, rather than just doing all of the same stuff without an LLC and you would be a sole proprietor.

But a lot of people think that there are some huge tax benefits to the income that you're making when you're wholesaling that's different than what you would be taxed on if you were just a sole proprietor.

And in my understanding that's not the case.

An LLC is what we call a “pass-through tax entity” which means that the income that your LLC makes is going to be passed through to your personal tax returns, and you would pay taxes on that money the same way you would pay taxes on the rest of your income.

If you wanted to have your LLCs wholesaling income taxed differently than your personal income, which could have some advantages, you would need to have an LLC that's taxed as a corporation, something like an S corp or a C corp.

But that is a whole different process that you would have to do with the IRS and there are other regulations and requirements, so that's something you should definitely get help from a tax professional with.


Tax Deductions

 The average person in America pays about 14% of their income to taxes, but if you're a homeowner your tax bill will likely be much less so this might be a reason to push you towards house hacking sooner rather than later.

The tax system is complicated and I'm definitely not an accountant, but there are some things you can do to lower your tax bill such as take deductions on your mortgage interest.

There's also something called the home office deduction which is available to both renters and homeowners. So if you're using a portion of your home for your office like a lot of us are doing right now, you may be able to lower your tax bill with that.


Build your business credit

A third reason to get an LLC that isn't talked about much is to help build your business credit.

There are certain loans and grants out there that are available to businesses but aren't available to individuals. 

The idea is that if you start wholesaling through your LLC and you're generating income and paying expenses, you're gonna have some business and bank account history that might help you qualify for those programs.

But you need to actually be running a business and those transactions need to be legitimate.

You should be verifying and double checking everything that I'm saying with a tax professional who knows your own specific situation.

If you're going to open an LLC and apply for things using your business credit and using your LLC, then it needs to be legitimate so just make sure you're doing things the right way and applying for loans and grants when you actually have the bank transactions to qualify for them.

Also here are a couple of other quick hitters if you're considering setting up an LLC.

First, what states should you do it in?

Now this is going to depend on a lot of different factors, especially if you're virtual wholesaling and you're living in a state that's different than where most of your income is going to be coming from.

Again, this is something that a tax professional is going to be really helpful with.

Because although there are different filing fees to start an LLC depending on what state you choose, picking the cheapest one is not always the best option.

Because some of them might charge you extra out of state taxes, or get you to file as a foreign LLC, which has a whole different requirement.

So just let your tax professional know what state you're going to be getting most of your income in, where you're living, and all that good stuff.

You'll also want to stay organized.

If you wholesale through your LLC, there are going to be documents that you get when you create that LLC that the title company is going to need to see so that you can legally sign on behalf of that LLC, receive money for that LLC, and all of that stuff.

So just keep your documents organized as well as keep your bank accounts organized.

You're going to want to open up separate business bank accounts that handle all of the income and expenses related to your LLCs business.

You do not want to commingle your business bank account funds with your personal bank account funds, because that's one of the easiest ways to pierce that corporate veil and lose you the protection of having that LLC in the first place.

You can also use software like QuickBooks which can help you keep track of all of the income and expenses in your LLC, and that'll make it easier for you and your CPA to document your tax write-offs come tax time.

Finally, don't forget to ask your CPA about the annual fees associated with whatever state you've set your LLC up in.

Some fees are as low as zero dollars per year and some states have annual fees of over three hundred dollars a year, but remember it's not about choosing what state has the cheapest filing or annual fees. 

Because there could be other fees associated if you choose to set up your LLC in a state that you don't actually live or do business in.

Again, even after this entire post, my advice to you is don't spend too much time worrying about your LLC.

Start investing in yourself and your business by having that conversation with the CPA, and if you don't have the funds just yet, get out there and hustle.

Do a deal in your personal name, and reinvest those funds in your business so that a CPA can get you set up with everything as it needs to be.

Until next time, thanks so much for reading.



So, now that you've gotten an intro to LLCs and taxes, are you ready to get started?

If so, you can use my Free Resource Pack to help get your real estate investing journey off the ground. It includes:

  1. My Offer Sheet Template
  2. My Phone Scripts for Calling Real Estate Agents
  3. The Wholesaling Deal Tracker

So what are you waiting for?

Start your real estate investing journey towards financial freedom today!


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