Partner profit splitting
My business partner and I bought a 5+ acre parcel of land in a Portland, ME suburb about ten years ago. My partner put up 75% and I put up 25% of the purchase and closing costs.
Over the course of ten years I have paid all the realesstate taxes on the property and as a result the percentage of money paid by each of us has equaled (not taking into consideration inflation). The land is currently valued at about 250% of our purchase price.
Unfortunately, the two of us never discussed how we would split profit when the land was sold. We only agreed that I would carry ownership expenses until we sold. Now we are wondering how we should consider the splitting of eventual profits. The two scenarios below are ones we are considering.
1. My additional equity input in the form of tax payments would equal in value to the original difference in our 75/25 purchase input leading to a 50/50 split in the overallprofits?
Or
2. The total amount of taxes paid would be deducted from the overall profit and credited to me and the remaining net profit split 75/25 based on the the purchase ratio?
Obviously the former scenario is to my advantage while the latter is to my partners. Is there other ways we should be thinking about this?
Thanks for any help or advice in advance.
Most Popular Reply
@Geo Sum, Id say option 2 is the cleaner and fairer approach. You both agreed upfront to a 75/25 ownership split, and that's what determined who took the investment risk and who benefited from the appreciation. The property taxes were an ownership expense that you agreed to carry, so I'd have those reimbursed to you from the sale proceeds first, then split the remaining net proceeds according to the original 75/25 ownership percentages.
It's much easier to reimburse documented expenses than to redefine ownership after the fact. It also keeps the accounting straightforward and avoids turning ten years of tax payments into an equity debate that neither of you formally agreed to at the outset.