How does the IRS tax an Acquisition Fee?

Question

I recently closed a 240 unit deal and in my deals as the syndicator, I received an acquisition fee for putting the deal together.

My background is a CPA so I feel I have a pretty good understanding on how the fee should be taxed.

I was recently speaking with a fellow investor and they were treating the fee a bit differently than me.

So curious to know from the BP expert community how your acquisition fee has been taxed?

Brandon Hall · Answer

@Daniel Guerra it depends on what side of the transaction you are on. If you are receiving the acquisition fees, it's treated as ordinary income. Receive these fees in an S-Corp if significant.

If you are paying the acquisition fees, they are added to the basis of the property and depreciated just like all acquisition costs would be.

Brandon Hall · Answer

@Brian Adams @Jay Hinrichs acquisition fees are treated like costs to acquire an asset. They are capitalized and depreciated/amortized over the life of the asset.

Brian Adams · Answer

@Jay Hinrichs, yep I agree, a guaranteed payment (ordinary income) subject to SE tax.

I should have been more clear in my original post. How would the entity treat the acquisition fee? In this example the entity is an LLC.

Robert F. · Answer

Hey @Brandon Hall do you have any suggestions for institutional quality CPA's? Have used a couple I haven't been impressed with and would really love a recommendation.

Brandon Hall · Answer

@Daniel Guerra it's still coming to you as ordinary income. You may be able to restructure the contract by taking out the words "acquisition fee" and instead receiving compensatory equity. A whole slew of rules revolve around this type of "income" but you may be able to defer recognizing it until liquidation of the property. At that point you may be able to recognize it as capital gains.

Do you have a CPA and attorney on your team? If you do, make sure they are working together on this. I normally chat with attorneys about how to structure a client's contract to maintain liability protection while maximizing tax efficiency.

Daniel G. · Answer

@Brandon Hall Your first assumption is correct, I would be receiving the acquistion fee to re-invest it into equity in that particular deal. I would not be collecting it. How does this change things?

Daniel G. · Answer

@Brandon Hall @Brian Adams Do you guys have a final answer for this? Are acquisition fees treated like a cost to acquire an asset and are therefore capitalized and depreciated or are they treated like ordinary income?I'm structuring a round of funding and want to have a good understanding of this.

Thank you,

Brian Adams · Answer

@Jay Hinrichs, I appreciate your response and don't mean to make this into a tax lesson.

From my perspective at the entity level, the LLC treats the acquisition fee as a capitalized item (reflected on the balance sheet) and can't be depreciated or amortized.

What do you think @Brandon Hall?

Jay Hinrichs · Answer

@Brian Adams  no clue... with my LLC's everything flows to me personally and I have been in the business for 40 years so its always just income to me of a personal nature and SE tax. other than my rental portfolio when I had it I have liquidated that .. so I am just all notes and short term value add so that's all I know

Jay Hinrichs · Answer

seems pretty simple .. I am in NO way a tax expert I hire those.. but to me it would be like commission income or ordinary income subject to self employment tax... at least I think.. ?

How does the IRS tax an Acquisition Fee?

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