Splitting Tax benefits in a Partnership Agreement

Starting Out
7yFollow

Splitting Tax benefits in a Partnership Agreement

Paxton R Nicholas
Dover, NH · Member since 2018 · 7 posts · 0 votes

I am looking to close a 4 unit property very soon with a close family friend. We know the risks in getting involved with family/friends but we don't care right now. That said, we want to be smart and get everything down in writing so we are in the process of drawing up a partnership agreement. Here are the foundations of the partnership:

  • Loan is in my name
  • Deed is in my name
  • I have agreed to do all property management work
  • Initial cash investment (DP + Closing costs) are being split 60% me / 40% him
  • NET will be split 60/40
  • He will be paying me 6% of all rent income each month. Property management expense will not be included in calculating NET.

My question is How does this work for our taxes? If there are benefits how can we split those up?

0Reply
33 views

Most Popular Reply

Stanley Bronstein
Attorney, CPA, Broker & Author · Scottsdale, AZ · Member since 2018 · 532 posts · 488 votes
7y

@Paxton R Nicholas I recommend you go talk to a CPA with real estate experience. The main reason a Joint Venture might be better here is that the loan is going to be in your personal name and the Deed is going to be in your personal name. Once you know what you want, get a knowledgeable attorney to draw up a Joint Venture agreement for you.

If it weren't for the fact the loan and deed are going to be in your name, I would typically recommend you set up a LLC. But, since there's a lender involved, that would probably complicate things and you would need lender's consent. Since it's 4 units, I'm guessing you're getting a personal loan and not a commercial loan, so putting in an LLC might make the lender uncomfortable.

The JV is typically for a one transaction deal, but not always. It will still be taxed as a partnership (a general partnership, NOT a limited partnership) and should probably file a partnership tax return.

Go hire professional help. You'll be glad you did.

1Reply
See this reply in the discussion

10 Replies

Jump to latestLatest
  • Account Closed
    Specialist · Paradise Valley, AZ · Member since 2018 · 3k+ posts · 2k+ votes
    7y
    Originally posted by @Paxton R Nicholas:

    I am looking to close a 4 unit property very soon with a close family friend. We know the risks in getting involved with family/friends but we don't care right now. That said, we want to be smart and get everything down in writing so we are in the process of drawing up a partnership agreement. Here are the foundations of the partnership:

    • Loan is in my name
    • Deed is in my name
    • I have agreed to do all property management work
    • Initial cash investment (DP + Closing costs) are being split 60% me / 40% him
    • NET will be split 60/40
    • He will be paying me 6% of all rent income each month. Property management expense will not be included in calculating NET.

    My question is How does this work for our taxes? If there are benefits how can we split those up?

     I'd highly recommend doing a Joint Venture instead of a partnership. You get the same benefits without the risks.

    0Reply
  • Paxton R Nicholas
    OP
    Dover, NH · Member since 2018 · 7 posts · 0 votes
    7y

    Thanks Mike. I looked into joint ventures vs. partnerships (here), and it seems to me like the only difference is that a joint venture is between companies rather than individuals. Would we both need to start companies in order to do that? If so that would not be an option for us, due to the financing option we are using.

    0Reply
  • Account Closed
    Specialist · Paradise Valley, AZ · Member since 2018 · 3k+ posts · 2k+ votes
    7y
    Originally posted by @Paxton R Nicholas:

    Thanks Mike. I looked into joint ventures vs. partnerships (here), and it seems to me like the only difference is that a joint venture is between companies rather than individuals. Would we both need to start companies in order to do that? If so that would not be an option for us, due to the financing option we are using.

     These differences are what you are looking for and it is huge!

    • "In a partnership, members cannot act according to their wishes because they do not have any individual identity. However, a member of a joint venture can retain the identity of his/her firm or property.
    • Although a joint venture is very similar to a partnership, a joint venture is generally more limited in scope and duration.
    • A joint venture is generally considered to be a partnership for a single transaction."

    If you are doing singular transactions, you want the flexibility and reduced risk of a Joint Venture. It is property specific. It is also easier for tax reasons. You do not need to be a company. When I was doing Joint Ventures my LLC was the Managing Investor and the other person (not an LLC or business) was the Capital Investor. We split the profits 50/50. We would create a different JV Agreement for each property. Each JV Agreement was limited in liability to that one Agreement or property.

    If you have a Partnership, the assumption is that you are doing multiple projects (properties) and your partner can do something on a different project and get you sued. It tends to be more "all encompassing". Every partner is on the hook for every other partner's actions for all of the properties. 

    When attorneys look for people to sue, they look for assets. A partnerships shows all assets. More likely to get sued. A JV Agreement shows only one asset. Less likely to be sued.

    0Reply
  • Bill F.
    Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes
    7y

    @Paxton R Nicholas You and your partner should go and sit down with a CPA and review the details of both of your tax situations to figure out the best way to structure this deal. Then sit down with an attorney to draw up a partnership/operating agreement. 

    You'll need a CPA to do the taxes anyway so may as well develop a relationship now. Having a lawyer draw up the documents is like wearing a seat belt when you drive. Most of us have never needed it, but for those that have, it was a life saver.

    0Reply
  • Stanley Bronstein
    Attorney, CPA, Broker & Author · Scottsdale, AZ · Member since 2018 · 532 posts · 488 votes
    7y

    @Paxton R Nicholas I recommend you go talk to a CPA with real estate experience. The main reason a Joint Venture might be better here is that the loan is going to be in your personal name and the Deed is going to be in your personal name. Once you know what you want, get a knowledgeable attorney to draw up a Joint Venture agreement for you.

    If it weren't for the fact the loan and deed are going to be in your name, I would typically recommend you set up a LLC. But, since there's a lender involved, that would probably complicate things and you would need lender's consent. Since it's 4 units, I'm guessing you're getting a personal loan and not a commercial loan, so putting in an LLC might make the lender uncomfortable.

    The JV is typically for a one transaction deal, but not always. It will still be taxed as a partnership (a general partnership, NOT a limited partnership) and should probably file a partnership tax return.

    Go hire professional help. You'll be glad you did.

    1Reply
  • Paxton R Nicholas
    OP
    Dover, NH · Member since 2018 · 7 posts · 0 votes
    7y

    Thank you all for the help here.

    I have an appointment scheduled already with the lawyer so I think I will ask him if he knows a good local CPA for real estate investors. If anyone finds this post from around the Seacoast New Hampshire area and knows a good CPA for rentals, hit me up!

    I'll make sure to ask both our lawyer and the CPA about whether or not a joint venture will be an option.

    0Reply
  • Keith Gilbert
    New England · Member since 2018 · 43 posts · 21 votes
    7y

    @Paxton R Nicholas - Is Keene too far for you?

    0Reply
  • Richard Dale-Mesaros
    Investor · Campton, NH · Member since 2010 · 285 posts · 143 votes
    7y

    Whenever considering your entity structure, in addition to your CPA and your attorney, it's always useful to run it by your insurance agent and your lenders - each of these characters may have different perspectives on the entity choice and it's worthwhile making sure all four are on board with the one you choose. 

    Not sure if it makes sense for either you or your partner, but you could consider putting your funds in a self-directed IRA and the building profits go back into the IRA tax-free if the IRA has invested in the building - check with a decent CPA on this, or ask Equity Trust, one of the better self-directed IRA co's. You have to make sure the IRS won't consider this 'self-dealing' if you are managing the property. I will ask our 500+ KW agents in NH who they suggest for a CPA in the seacoast area and let you know. Hey, let's connect on BP! :)

    0Reply
  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    7y

    @Paxton R Nicholas

    In addition to the comments that you received.

    You will be required to file a partnership return regardless if you created a joint venture or a partnership/LLC.

    Ultimately, the entities/people in the joint venture or the members of the LLC(partners in a partnership) will be getting a K-1 from the joint venture/partnership.

    There may potentially be some guaranteed payment reported on the K-1 depending on how you structure the receipt of 6% of rental income into the calculation.

    You may want to consult with a CPA/Advisor/Attorney. Especially if you are dealing with other people's money.

    [email protected]917-280-8544
    Basit Siddiqi CPA4.979 Reviews
    View Page
    0Reply
  • Paxton R Nicholas
    OP
    Dover, NH · Member since 2018 · 7 posts · 0 votes
    7y

    Yes. Thank you for all the help here. I think I definitely need to hire a professional. We have a meeting with an attorney tomorrow where we plan on presenting a high level plan for how we want this to work. That, and I know I'll be berating the guy with questions on this. I'll ask him who he would suggest for a CPA too.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free