Advice on Structuring a Real Estate Partnership Deal
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Accountant · San Diego · Member since 2025 · 2 posts · 1 vote
11moI 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.
13 Replies
- Title Representative · Irvine, CA · Member since 2017 · 874 posts · 519 votes1y
If there is no debt on the property, then you can form an LLC where you are both members with allotted percentages of ownership and a side agreement that details further what the obligations are for each side. It may be worth spending 5k-10k on a transactional real estate attorney for this.
- Rental Property Investor · San Diego, CA · Member since 2020 · 91 posts · 13 votes1yThank you. Sorry, I did not get notification. That makes sense. But one thing I don't know is how to allot percentages without knowing the real construction cost. Or it can be specified in the agreement.
Quote from @Bryant Brislin:
If there is no debt on the property, then you can form an LLC where you are both members with allotted percentages of ownership and a side agreement that details further what the obligations are for each side. It may be worth spending 5k-10k on a transactional real estate attorney for this.
- Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes1y
Quote from @Andy Chen:
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
My recommendation- Establish a Joint Venture that lays out each partner's contribution to the project. His contribution is the property/land & your contribution is the capital required for the construction. You'll have to ensure that the contribution is protected through a recorded instrument or lien against the property. I'd hammer it out with your potential partner on paper first, then take it to an attorney to clean it up & consummate the relationship.
- Rental Property Investor · San Diego, CA · Member since 2020 · 91 posts · 13 votes1y
Quote from @Crystal Smith:
Quote from @Andy Chen:
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
My recommendation- Establish a Joint Venture that lays out each partner's contribution to the project. His contribution is the property/land & your contribution is the capital required for the construction. You'll have to ensure that the contribution is protected through a recorded instrument or lien against the property. I'd hammer it out with your potential partner on paper first, then take it to an attorney to clean it up & consummate the relationship.
@Crystal Smith I love your recommendations. I will start documenting the thoughts and proposal. Then we will have the attorney to clean up.
- Rental Property Investor · San Diego, CA · Member since 2020 · 91 posts · 13 votes1y
@Crystal Smith one more question. What kind of attorney do I need for this? Do I need a real estate attorney? TIA.
- Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes1y
Quote from @Andy Chen:
@Crystal Smith one more question. What kind of attorney do I need for this? Do I need a real estate attorney? TIA.
A real estate attorney is preferred.
- Accountant · San Diego · Member since 2025 · 2 posts · 1 vote11mo
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.
- 11moBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
I would not partner with a friend
If you do decide to partner with a friend, I would partner on a property purchased jointly in the future instead of one that was already owned by the one of you.
Why not just charge him to develope the property instead of partnering on the property?
You both walk away with what you want.
You get compensated for your work.
He gets a property that is valued more which he can sell for a larger cost.
If that works out well, i would consider then partnering.
best of luck
Basit Siddiqi CPA4.979 Reviews - 11moAshish AcharyaBusiness MemberCPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
That’s a solid opportunity, but you’ll definitely want the structure nailed down early to avoid tax headaches later.
From a tax side, the cleanest option is to form a joint venture LLC where your friend contributes the property and you contribute the construction funds and expertise. The LLC then owns the project, and profits are split based on an agreed percentage.
That way, your capital and work are recognized as an investment, not just income. If you just help build and split profit without an entity, the IRS could treat your share as ordinary income instead of capital gain, which means higher taxes.
An LLC with a clear operating agreement protects you both and keeps the income taxed as investment gain when sold. Happy to connect!
INVESTOR FRIENDLY CPA®5241 Reviews - Member since 2025 · 2 posts · 0 votes10mo
I used to be practicing cpa but am now a builder. The good thing is LLC/partnerships are flexible and you can draw up the terms between the two of you to accomplish your purposes. One thing to discuss with CPA and or attorney is having the capital contributed be a combination of debt and equity. Here is simple example. Partner A has $100,000 cash and Partner B has time and expertise to build. For equity, partner A puts in $100 and partner b puts in $100. This is simple and they are now 50/50 partners in the LLC. partner A then loans his $100,000 to the partnership. Let's say the partnership earns profit of 50,000 and then closes down. Partner A would get 25,000 or the profit and partner b would gets his 25,000 of profit as well as the 100,000 he loaned. it can get complicated with real estate quickly so find a good cpa or attorney. I don't practice as cpa anymore but reach out with any questions and I can steer you in the right direction.
- 10moDoug SmithPro MemberLender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes
Quote from @Andy Chen:
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
I do want to chime in with a couple of mistakes I've made with partnerships I went into. No one gets married thinking they are going to get divorced, but half of them end that way. All things end badly, otherwise they wouldn't end. I went into my first partnership with us writing our agreement and not being represented by counsel. It ended in me having to file a lawsuit and I nearly lost everything...including my marriage. I only share this to say that I wished I had really thought more about the "what if" things go really, really bad between the partners. The partner tried to rob me blind. I wish I had done a better job of protecting myself. I've obviously learned since them. Good luck to you.
- Member since 2023 · 4 posts · 0 votes10moI'm thinking about going into business with a family friend. Would you mind telling me more about your experience and how I can protect myself?
Quote from @Doug Smith:
Quote from @Andy Chen:
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
I do want to chime in with a couple of mistakes I've made with partnerships I went into. No one gets married thinking they are going to get divorced, but half of them end that way. All things end badly, otherwise they wouldn't end. I went into my first partnership with us writing our agreement and not being represented by counsel. It ended in me having to file a lawsuit and I nearly lost everything...including my marriage. I only share this to say that I wished I had really thought more about the "what if" things go really, really bad between the partners. The partner tried to rob me blind. I wish I had done a better job of protecting myself. I've obviously learned since them. Good luck to you.
- 10moDoug SmithPro MemberLender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes
Quote from @Trey Freeman:
I'm thinking about going into business with a family friend. Would you mind telling me more about your experience and how I can protect myself?Quote from @Doug Smith:
Quote from @Andy Chen:
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
I do want to chime in with a couple of mistakes I've made with partnerships I went into. No one gets married thinking they are going to get divorced, but half of them end that way. All things end badly, otherwise they wouldn't end. I went into my first partnership with us writing our agreement and not being represented by counsel. It ended in me having to file a lawsuit and I nearly lost everything...including my marriage. I only share this to say that I wished I had really thought more about the "what if" things go really, really bad between the partners. The partner tried to rob me blind. I wish I had done a better job of protecting myself. I've obviously learned since them. Good luck to you.
No one goes into a marriage thinking they will get divorced, yet 50% of them end that way. Partnerships are no different. It seems that someone always is doing more than the other, resentment sets in, and problems pop up. That's been my experience. I would first make sure that you have clearly defined goals and expectations. Sit down and define what success looks like and what each partner is responsible for. Second, think about "what if things go bad". How will you exit? Most importantly, spend the money on attorneys to draft the operating agreement and other agreements. Good fences build good neighbors. I made a massive mistake in my first big venture because I was arrogant enough to think that my partners and I were friends and that I could do the agreement myself. I lost more than you can imagine. Make sure you are prepared to lose your friendship and your investment going into it, but make sure you are represented by counsel. That's my take. I wish you well in your endeavor.
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