So you’re passionate about buying and appraising real estate. It’s a fantastic business to be in and can be very lucrative. But do you know the ins and outs of structuring your business? Will it be an LLC, a corporation, a DBA, or a partnership? This article teaches you the differences and helps you determine what best meets the needs of your personal business. You will learn how to structure your real estate business, what the tax advantages and penalties are, how to create tax-free income from the sale of your personal residence, and how to use a 1031 exchange to defer capital gains and create wealth.
The first thing you need to determine is which business entity you should select to structure your business, based on the tax advantages, liability, and separation of personal and businesses assets. There are pluses and minuses to each business structure, and it is advisable that you consult your personal finance expert first.
- LLC – An LLC is a limited liability company. It is a separate entity that combines the flow-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. An LLC can have its own taxpayer ID number, open bank accounts, and do business under its own name. At tax time, the LLC will flow through the income and deductions to your personal tax return.
- Corporation – A corporation is a distinct and separate entity as well, but it will be taxed at a certain corporate level. While a corporation is subject to higher taxation, it offers more flexibility in terms of income shifting.
- DBA – DBA means ‘doing business as’. This means you could use a fictitious name, a trade name, or an assumed name. A DBA gives you the opportunity to create a business name that may be related directly to the business or may be related to the owners of the business. It allows you to hold your property name so it is not connected with your own personal assets.
- Partnership – A partnership has that same ability to flow through to your personal tax return. What it does not offer is any liability protection.
- Sole Proprietorship – The sole proprietorship is the simplest form under which one can operate a business. It is not a legal entity. It simply refers to a person who owns the business and is personally responsible for its debts.
Lastly, important components of protection that your business needs to have in place: a standardized accounting system, a record keeping system, and insurance. Keeping detailed accounts is highly important for tax purposes or in the event of an audit. For further assistance, contact a local appraisal management company.