Advice on Structuring a Real Estate Partnership Deal
Hi all, I’d like your advice on how to structure a potential deal.
A friend of mine owns a property outright that still has plenty of space for additional development. Since I have construction experience, he’s interested in partnering with me to build more units.
The property originally cost him $600k, and the projected added value is about $2.4M. I estimate total construction costs will be around $1.3M–$1.4M.
His initial idea is for me to cover the construction costs, and then we split the profit once the project is sold.
How would you recommend structuring this deal?
TIA
Most Popular Reply
I work in tax (CPA). Make sure you have a competent CPA handle the partnership/LLC filings. One partner is contributing a property with a built-in gain while the other partner is contributing cash or services. The partner with the built in gain will have an asymmetrical allocation of tax income/losses due to code section 704c. Essentially, you can't split the (taxable) profit 50/50 as that does not match the economics of the transaction. It gets complex fast, but in essence, say Partner A contributed $600k cost property with a FMV of $1.5m and say Partner B contributed $1.5m in cash. The current FMV is then $3m. Say property gets developed and sold for $3.4m. You both cash out at $1.7m each but for tax reasons, Partner A gets $1.1m in taxable gain while partner B gets $.2m. There's more to complexity involved, but keeping it simple for now. An attorney is best to make sure the structure is what you both want. A CPA is best for understanding the tax allocation.