Recently I purchased a home in Georgia and received $35,000 after the
deal closed. My goal is to reinvest this cash in similar opportunities
until it grows to about $100,000. At that time I want to start
enjoying some of the money for personal income. In example, I turn a
deal that nets $25,000 and I want to realize $5,000 as personal income
and reinvest the rest. Will forming a LLC allow me to pay taxes only
on the $5,000 as realized for personal income, or will I have to
consider it all capital gain and pay taxes on the entire amount?
Basically, I am reasoning that if I form a LLC it will allow me to pay
taxes only on money used for personal income (as the remaining will
always be tied to real estate investments). Is this true?

An LLC will not allow you to avoid taxation.  You still pay taxes on
the profits of your LLC.  This is not to suggest that forming one is
not a good idea and does have significant advantages, however,
especially by limiting personal liability in most cases.

What you will want to consider is Section 1031 Exchanges.  These allow
you to trade your property for another one (typically more valuable)
without reporting a profit on the sale of your existing property,
thereby deferring taxes on the gain.  You can elect to receive some
cash, known as "boot" in the trade, which would allow you to realize
the desired personal income.  This would, of course, be taxable. 
There are also some fees from the Qualified Intermediary and some tax
consequences if a mortgage is involved.  However, the value of the tax
deferment is usually much greater.

I have attached two articles describing how an LLC can benefit you as
a real estate investor and two articles describing Section 1031
Exchanges.  This transaction has a number of rules associated with it
that must be followed, so I encourage you to contact a qualified real
estate attorney and/or accountant well in advance of performing a
transaction.

Sincerely,

Wonko

Search terms: section 1031 exchange; LLC real estate investing tax

"How to set up a real estate business" by George Saenz, Bankrate.com
(2005) http://www.bankrate.com/brm/itax/tax_adviser/20050916a1.asp

"Tax and liability shelter come with an LLC" by Steve McLinden,
Bankrate.com (2005) http://www.bankrate.com/brm/news/real-estate/20040522a1.asp

"Property swaps can save tax dollars" By Pat Curry, Bankrate.com
(2005) http://www.bankrate.com/brm/itax/tax_watch/20010522a.asp

"1031 Exchange Manual" 1031 Corporation (2004)
http://63.123.136.2:28122/1031%20literature.htm

If you took possession from the proceeds of the sale, then this would
be taxed at capital gains rates.  Either you or the corporation had
the gain...

You can find your gain out here:
http://www.1031store.com/resources/1031_capital_gains_calculator.php

For more information about 1031 exchanges here is a new resource
center I've created...
http://www.1031store.com

It will help with the basics and meeting professionals that specialize in the area.