Starting out, out of state, with partner

Barret Davidson
OP
Member since 2025 · 3 posts · 1 vote
1y
@William Whitley awesome! Great advice, yeah I'm thinking a 50/50 partnership llc and then yes keep that separated from his contracting so we can pay him like any contractor. Good call on talking with both to to make an informed decision, I won't be able to get a cpa right now, but if I wait two weeks they will all be free haha
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Tenzapa Wakombe

Real Estate Agent · Nashville, TN · Member since 2025 · 126 posts · 62 votes

"Sounds like you're in a great position with your brother's contracting skills and Chattanooga's lower barrier to entry! An LLC is a smart move for liability protection—just be sure to set clear terms in an operating agreement.

Starting with a flip and rolling profits into a 1031 exchange is a solid strategy, just remember the reinvestment requirements. Tennessee has no state income tax, which is a big plus, though looking into local tax implications is wise.

With your brother on the ground, you’ve got a strong advantage, but if you plan to hold rentals, a good property manager will be key. Excited to see how your first deal goes!"

Barret Davidson
OP
Member since 2025 · 3 posts · 1 vote
1y
@Tenzapa Wakombe I will definitely look into 1031 to see if that will work and make all the requirements! I'm guessing you have to have the other property practically already under contract to make the 45 days?
0 Reply

Tenzapa Wakombe

Real Estate Agent · Nashville, TN · Member since 2025 · 126 posts · 62 votes

Yeah, with a 1031 exchange, you have 45 days from the sale to officially identify your next property, so having options lined up early is key. You don’t necessarily need it under contract right away, but you do need to submit your identified properties in writing within that window. Then, you have 180 days to close. Working with a good 1031 intermediary can help keep everything on track

Fulton Abraham Sanchez

CPA| New Clients Welcome| 50 States · Member since 2016 · 440 posts · 97 votes

Hi Barret, Great strategy partnering with your brother in Chattanooga! It's better for your business, form an LLC for clear partnership structure and tax advantages.
Plan taxes carefully for out-of-state investing (TN vs. TX), use 1031 exchanges to reinvest profits and defer taxes effectively.

Consider professional CPA guidance to optimize your strategy and stay compliant, this is the best place you can reach one.

Bernice RetzloffPro Member

Memphis, TN · Member since 2024 · 234 posts · 100 votes

Hey @Barret Davidson

Sounds like you're in a great position to start investing, especially with your brother's contracting expertise in Chattanooga. The low barrier to entry there makes it attractive, and having a trusted contractor on your team is a huge advantage for flips and rentals. Structuring your partnership is key—an LLC can offer liability protection, but you'll want to consult an attorney to ensure it aligns with your investment goals. Using a 1031 exchange after your first flip is a solid strategy to defer taxes and roll profits into your next deal. If you're open to other markets, Memphis could also be worth considering. It has strong rental demand, solid cash flow potential, and favorable landlord laws. Whether you stick with Chattanooga or expand to other Tennessee markets, the key is building a strong team (property managers, lenders, agents) to support your out-of-state investments. Happy to connect if you're considering Memphis down the line!

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Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

@Barret Davidson For a property to qualify for a 1031 exchange, it must be purchased with the intent to be held for investment use. Fix-n-flips do not meet this criteria because they are held as inventory to be sold for a quick profit.

If you purchase an investment property and put a renter in it for about a year, that would demonstrate the intent to hold and be perfectly fine.

Occasionally, we get an investor who intends to hold onto a property when an investor approaches them with an offer that is too good to refuse, despite their intent to hold they end up prematurely selling. Or their intent could have been to hold but something happens that causes them to change their intent. Accidents can happen but it must have been your intent to hold. And something causes you to change that. When the same "accident" happens several times a year it starts to look a litle less "accidental". That's why keeping your flipping and buy and hold operations separate can help you. Or just change your model so you do the BRRRR method so popular here on BP - Buy, repair, rent, refinance, and later sell when you can do a 1031.

Any tax paying entity can do a 1031. If the two of you have an LLC that LLC can do 1031 exchanges. If the two of you partner up and each go on the deed as tenants in common then you can each do your own 1031. Or you can stay together on the 1031 moving forward. The most important factor is who the taxpayer for the property is since one of the requirements for the 1031 exchange is that whoever the taxpayer for the old property is also the same for the replacement property.

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E.J. McCaffrey

Member since 2025 · 194 posts · 140 votes

I agree with the others that choosing the right business structure for you and your brother is very important. No matter what kind of investments you make, it's essential to keep your personal and business assets separate. This protects you in case of a lawsuit and keeps your finances safe.

If you plan to focus on flipping houses, be aware of the IRS "Dealer Status." This means the IRS sees your real estate as inventory rather than an investment.

Avoiding dealer status is important because it takes away key benefits like 1031 exchanges, installment sales, long-term capital gains tax rates, and depreciation deductions. Plus, real estate dealers must pay self-employment tax on rental income.

Note: This information is for educational and informational purposes only and does not constitute legal, tax, financial, or investment advice. No attorney-client, fiduciary, or professional relationship is established through this communication.

3 Reply

Brian LevredgePro Member

Investor · Chattanooga, TN · Member since 2009 · 1k+ posts · 903 votes

I originally started investing in TN from CA 16/17 years ago and then moved here about 12 years ago. It's a great place to invest. You're not going to 1031 flip houses though, as someone else pointed out. A couple other things to think about. You're talking about having both an "active" (flips) business and a "passive" (rentals) business, which for tax purposes are two different things. Don't co-mingle them in the same LLC. You run the risk of converting your passive taxation to active income and that's not good.

TN does not have a personal income tax, but it definitely has a business income tax. It's called the Franchise and Excise (F&E) tax and it's levied on all entities in the state that offer legal protection to their owners with limited exceptions. So your flipping entity would be subject to the F&E tax. Your rental entity (1-4 unit, max 4 properties) may not due to the FONCE exemption for closely held family businesses, but I would check with a CPA who is familiar with TN tax law on that matter whether two brothers qualify rather than a husband and wife.

You're better off using a TN LLC because the law still requires foreign filing for out-of-state entities so you might as well only pay one set of filing fees, annual reports, and all other related expenses rather than two. And avoid doing a TN Series LLC for rentals. They suck. When you talk to the CPA they should be able to help you strategy because having rentals in conjunction with active trader income while being a full time real estate profession opens up unlimited passive losses to you so you can pay a much lower or no income tax. Best of luck.

Ken M.

Investor · Get yourself trained before doing something inadvisable. · Member since 2024 · 3k+ posts · 1k+ votes

Quote from @Barret Davidson:

Hello all, first post here! I live in McKinney Texas and have been looking into real estate investing for awhile. My business has recently taken off but DFW is a hard place to start. My brother is a contractor in Chattanooga Tn and we are looking into flipping and renting houses there. The barrier to entry there is so low and my brother being there with his own contracting businesses is a big help. So I need all the advice!
we are thinking of being partners, splitting the down payment, paying him to flip or renovate (he will get payed but also will do it slightly cheaper than market value). Should I get an LLC with us as partners? We are considering a flip first and then putting that cash into 1031 for more flips or some rentals.
any advice on out of state, partners, getting started, 1031, Tennessee taxes would be very helpful, thank you all and I'm looking forward to start my journey!
Also my brother has experience in contracting but not actually owning the real estate.

Just a quick word of advice. Bigger Pockets is full of people asking what they do now that they are in a 50/50 partnership and they can't agree on a major issue.

I know you and your brother are always agreeable and never have any disagreements, but in case that changes in the future,

I'd have each partner create an LLC and buy properties 51/49 (it can alternate going forward of course) but that way, for the sake of the investment, if there is serious disagreement of the solution to the then current problem, the partner with 51% ownership can decide what is best for the situation. The next property gets 49/51 ownership and alternates back and forth.

You can still disburse funds and profits 50/50. But you need to make tough decisions going forward and being 51/49 will cut down on delays, missed opportunities and legal expense. If your partner won't agree to this kind of setup, you need it more than you realize.

Ashish AcharyaBusiness Member

CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes

[email protected]941-914-7779

@Barret Davidson You're in a strong position to get started—partnering with a contractor in a lower-cost market like Chattanooga gives you both leverage and local expertise. Forming an LLC with a clear operating agreement is highly recommended since you're combining capital, splitting profits, and one of you is contributing labor. The agreement should clearly define roles, equity splits, how your brother will be compensated, and how key decisions will be made.

Since you’re planning to flip and eventually hold rentals, it’s important to keep these activities legally and financially separate. The best structure is to form two separate entities:

One LLC for flipping, where income is treated as active (ordinary) income,
Another LLC for buy-and-hold rentals, which generates passive income and offers long-term tax benefits like depreciation and potential 1031 exchanges.

This separation helps optimize your tax strategy, simplifies accounting, and provides better liability protection. Also, note that 1031 exchanges generally don’t apply to flips, since they're considered inventory, not investment property.

Tennessee has no state income tax on wages or rental profits, but does tax interest and dividends—so it's still wise to check with a CPA for state-specific guidance. For out-of-state investing, having accurate bookkeeping, a clear entity structure, and a tax advisor familiar with multi-state rules is key to long-term success.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

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Drago Stanimirovic

New to Real Estate · Miami, FL · Member since 2024 · 1k+ posts · 478 votes

Hey Barret,

You’re in a great spot, having your brother as an on-the-ground contractor gives you a big edge in Chattanooga. Starting with a flip is smart, but just know 1031 exchanges only apply to rentals, not flips so you’d need to hold the property briefly as a rental if you want to defer taxes.

Forming an LLC with an operating agreement is a smart move for liability and clear roles. Tennessee's no state income tax also helps your bottom line.

Let me know if you want help with financing or setting up the structure.

Tenzapa Wakombe

Real Estate Agent · Nashville, TN · Member since 2025 · 126 posts · 62 votes

Welcome! Sounds like you've got a solid setup—having your brother in Chattanooga as a contractor is a huge advantage. Partnering through an LLC is smart, just be sure to get an operating agreement in place and consult a CPA/attorney to structure things right.

Flipping to start makes sense, but just a heads-up: 1031 exchanges typically apply to long-term holds, not flips. A CPA can help you navigate that.

Tennessee’s no state income tax is great, but LLCs do pay an excise and franchise tax, so factor that into your numbers.

Sounds like you're on the right path—wishing you and your brother the best as you dive in!

Kp W.Pro Member

Investor · Chattanooga, TN · Member since 2021 · 32 posts · 14 votes

I'm here in Chattanooga and would definitely recommend setting up a partnership LLC. It's never the intent for things to go sideways but at least if you set up your LLC's operating agreement to document what each of you are bringing to the table, it keeps things clear.