How to keep accounting separate

Question

I’m looking to acquire a small investment property with a group of three people. We decided we will purchase as individuals to take advantage of more favorable rates. But if we purchase as individuals, how do we keep accounting separate from our personal finances?

Aaron Vargas · Answer

@Bob Norton thank you! We decided against setting up an LLC since it’s tough to get financing with a newly formed LLC. Is a formal partnership agreement required for tax time? Or are we able to allocate profits, interest deductions, depreciation, etc. based on what we agree even without a formal agreement?

Basit Siddiqi · Answer

@Aaron VargasIt looks like you will be acquiring the property as tenants in common(all 3 individuals will be on title and mortgage).You likely want to create a joint bank account where all the income/expenses will be flowing out of.Just an FYI, if you 3 are all on the mortgage, it really sucks becuase it will count towards every person's DTI ratio going forward.

Aaron Vargas · Answer

@Bob Norton that makes sense. A real estate attorney advised us not to quit claim deed the property from individual ownership to LLC. Since interest rates are so low now, there is more incentive for banks to call the loan due down the road should interest rates increase.

Last question for you. Are there any tax advantages to running the books through an LLC vs through a fictitious name or DBA?

I really appreciate your insight!

Bob Norton · Answer

@Aaron Vargas You could consider purchasing the property individually and then quit claiming the property into the LLC.  If all of you will be on the mortgage, then you could treat the investment as tenants-in-common, which means that you each own a specific fraction of the property and you split the revenue and expenses proportionately.  A partnership agreement is not generally required for taxes; however, it is very important to have before you get started so that you all agree on how you will run the partnership while everyone is optimistic about the investment and more likely to agree with each other.  If you wait until there is a disagreement, then the venture will end up in a lawsuit and everyone will lose.

Bob Norton · Answer

@Aaron Vargas You simply setup a bank account for each property to track the rents and expenses for the property and distribute the excess when you want.  Sounds like you are forming a partnership, which has tax implications that you need to check out.  Make sure that you have a good partnership agreement before purchasing any properties, then run the partnership in accordance with the agreement.  Most people setup an LLC for this for the added level of liability protection.

Brad Hammond · Answer

Hey @Aaron Vargas, this is very important.  Once you purchased the property, you should all put an equal amount of reserves into a shared bank account that is separate from your own.  A separate bank might make it easier too.  Just keep everything in that account or group of accounts and disperse profits out of that account.  I'm not sure what it would look like on your taxes but I'm sure a CPA can tell you how to do that.