I got wrapped into an informal partnership on a real estate flip project that we are about to sell after 3 months of rehab. We split the costs 50/50 and we are about to close soon. Since the partnership/deal wasn't under a LLC structure, I'm not sure what the proper way is to get paid from this deal. The property is under my partner's name and I technically don't have my name on anything. I paid my cut of the expenses directly from my personal account to his personal account. He wants to pay me directly upon close on the HUD and I'm not sure whether to take payment directly under my personal name or take payment using my existing LLC. I'm trying to mitigate my tax burden on this deal. Any advice?
Hi Navid, if you didn't have an LLC set up before-hand and the payments came from your personal account, I think you have to take it back personally. Next time you should have everything go through your LLC account and then you can take your payment through your company. Also, it would be prudent to have your agreement in writing going forward.
I think you should make everything more formal next time.
You and your partner should sit down with an attorney and draft a LLC/partnership agreement and set up some sort of entity.
it is also very scary that you are doing this deal and giving him money while everything is in his name.
What if he dies or decides to skip town.
It will take a long time before you see your money back if you ever get it back.
With that said, things are done, You and the partner may need to file a partnership return where you and your partner would get an allocated share of income from the flip.
The income would be subject to federal income tax, state income tax and self-employment taxes.
Ask your accountant for the best tax practice.
Thanks for the reply, appreciate the response. We had full intentions to make it more formal but the deal happened really fast. Fortunately, we both walked away with a whopping $50k on the flip! I talked to my CPA and he's trying to claim the proceeds as a capital sale rather than as active income. It will essentially be taxed as a short term capital gain or regular income tax at that point. What do you guys think about this? Would this be possible? The CPA said that we would both claim our cost basis on our individual return. For my own safety, I ensured that my payout was recorded directly on the HUD statement and was paid by the closing attorney
You can really do and say whatever you want on your tax return.
You mentioned this being a flip which is normally ordinary income subject to federal income tax, state income tax and self-employment taxes.
The difference between this option and the stcg is that the STCG would not be required to pay self-employment taxes. There is also the issue of having prior capital loss carryforwards and using them.
You can do and say whatever you want when you submit your tax return. The question is the return accurate?
Would the return be audited and would you be able to defend your position.
It looks like your accountant is looking for the route that pays the least tax to make you a happier customer. Will he be there to defend you or pay your penalties if you get audited?
You are also signing the return saying that the return is accurate.
Not to scare you, I am just saying the way it is.
This raises a good point. I'll need to talk with my CPA again to hash this out with him to ensure everything being done is being handled properly.