Chapter 5 – Liability issues
When you want to hit the jackpot in the world of real estate or just earn a living out of it, you need to consider all the issues that might arise out of the flipping process. There are tax problems and liability issues to consider and you need to know them before you start dealing with the actual flipping process.
A house that is sold less than one year after being purchased is seen as being flipped. And this invites a new guest into the picture of flipping: the IRS.
For the flipper, this results in taxes!
Depending on what status you are being awarded by the IRS, you might be seen as investor, which is a good status to have, as a house flipper, or a dealer, which is not desirable. There are multiple factors that can bring you the status of dealer, but in the end IRS is the one that labels you based on your overall facts and circumstances. Some of the most common factors considered by IRS to establish your dealer status are your main job, the amount of time you spend on the flipping business, the percentage of your income gained from flipping and your business behavior.
The dealer status comes with an additional 15.3% self employment tax for the profit he makes, so this is the main reason why a flipper fears the status of dealer. You must also know that if you make multiple flips per year or if you are a real estate professional you will get the dealer status by IRS.
Don't put your name on it
If you haven't been sued until now you don't exist! This is a funny, yet compelling phrase that mirrors the world we live in right now. People are going to sue you just because they can, at least some of them, so do expect to have an attorney on your back from time to time.
Now, let's get serious about this.
When you are doing business that involves putting your own name, money and family, you would want to know all your rights and financial risks, so you can reduce the risks of getting sued.
One of the most dangerous situations when making a business in your own name is being the sole proprietor. If you are sued, all your belongings are at stake, so you should consider having a cover in the form of a partner or a corporation. This will protect your belongings if you are sued or you go bankrupt. Another benefit of creating a corporation is people in the business will see you differently, when sealing the deal, as negotiating via a corporation looks more professional.
Owning real estate in your own name allows everyone to follow your trail, which is not something you would want to happen – after all, you want to keep your businesses private, as well as your life. To avoid leading a written mark by flipping properties, you can use a land trust. A land trust is revocable and a trustee is appointed to hold title in your name. Using a trustee is easy and can save you from a lot of problems, while it doesn't imply taxes or fees, being a cheap solution.
When you have to flip a house you will need to employ several professionals to get the job done, which might transform you into an employer, unless you avoid the hassle and turn to independent contractor status. But this one is not free of consequences when something bad happens and on a construction site there are many dangerous situations and tools.
This means you need to be insured for the worst case scenario, which implies having a construction worker who injures himself while working.
The injured person will ask for compensations and he is entitled to receive them, because you are the one who controlled the entire workflow and your relationship was not the one with an independent contractor.
To stay on the safer side with the contractors you have to clearly establish the type of relationship between you and the workers you have on site. This is made by drafting a contract, which can save you from fines and potential criminal charges.
You also need to make sure you do not hold the liability for additional subcontractors who may be employed by your contractor. In case an additional subcontractor is injured on the construction site, the person with the primary liability is held responsible and such as case, it will be you, so pay a lot of attention to your contracts. If you need to, hire a lawyer to help you out with the contracts until you can spot any sensitive clauses. Having an insurance is another way to ensure your peace of mind.