Investing with someone for tax benefits?

9 Replies

Right now I am the sole owner of an LLC that I just formed and I am going to transfer my first properties deed into it. For my second property, I have a partner who wants to go in 50/50 to help with his taxes at the end of the year. What is the correct way to make all this happen and not affect the LLC? I don’t want to make him an owner or employee...but want to make sure he benefits from a tax perspective. No one seems to know how to make it all work. Thanks.

@Colby Mulry this isn't that complicated of a situation. I would recommend starting a new LLC with the 50/50 ownership shown as well as the capital contributed. You will need to have a 1065 partnership return filed for the new LLC but this will help account for the 'tax savings' etc. for future use. Does your partner have passive gains that he is looking to offset? Or just general tax savings?

@Colby Mulry I am working on the same things as far as having partners come on board, and some of their main desires besides strong long term gains are the current benefits tax wise.

To my limited knowledge, they NEED to be an 'owner' to gain the 'tax benefits'. I am getting with my tax guy in about a month to discuss in more detail, but essentially I *think* the main 'tax benefits' come from being able to write of interest and the big one depreciation. Those are typically what give you a 'tax loss', even though you are cash flow neutral or positive.

In our case they will be a 'silent partner' by putting up the down payments, I will be doing ALL of the other work. This way, I can still manage to a large degree how I have been doing my own units and they can benefit finaancially. 

It will be interesting to see what those more experienced have to say.

Dan Dietz

@Brian M Sweeney I just formed all this a week or two ago and have all my accounts and credit cards in the first businesses name. Is doing a whole other LLC what is needed? We also already have an accepted offer on the table ready to go for our next place.

Check with your local attorney to see if you can just purchase the next property with your LLC holding a 50% interest and your investment partner (or their LLC) owning the other 50%.

At least that would be my starting point before I created another entity unless I had other reasons for doing so.  

@Colby Mulry

Before we can have any solution, we need to define the problem. 

If your partner intends to act as a lender - he will have a guarantee of his investment (secured by the property) but have no tax benefits whatsoever.

If he is primarily after the tax benefits, he will have to be a part-owner of the property. Directly or indirectly, with entities or not - those are details. The key concept is that he will have to be an owner.

The disadvantage for him is that his investment will no longer be guaranteed - it will only be as good as the property he owns. And while generally real estate appreciates in value, it's not a guarantee, and it is not liquid. What if he wants his cash out during the market downturn? For example, in Houston right after Hurricane Harvey.

The disadvantage for you is that you will be giving up some of your profit from appreciation. It's a big deal. Are you willing to sacrifice your long-term wealth build-up for the access to his money?

Once you decide to go ahead with this plan, then you will need to decide the equity split - 50/50 or otherwise and get with a local attorney to pick up the best structure for legal protection.

I am with @Michael Plaks - to receive any tax benefits he needs to be an owner.  When you create an operating agreement there are some limits to what you can do but you could allocate him all depreciation in any given year and it would hold up as long as your agreements met the substantial economic effect rules.  You could also pass any credits to a single investor however you must meet other complex partnership provisions such as liquidating in accordance with capital accounts, DRO, etc.  So in summary, there are options for you to pass some of the tax deductions to your partner however they must meet certain rules and you will need certain language or a signature to agree on said allocations/terms.

Originally posted by @Colby Mulry :
@Brian M Sweeney I just formed all this a week or two ago and have all my accounts and credit cards in the first businesses name.

Is doing a whole other LLC what is needed? We also already have an accepted offer on the table ready to go for our next place.

 Like everyone had mentioned here, If he is in this deal just because he wants the tax saving, he needs to be an owner.
Since you already have a LLC,

1) your LLC and he can form a partnership (not even LLC) agreement to invest in this new deal. OR

2) your LLC and he can form an another LLC to invest in this new deal.

Both ways, the new partnership, or new LLC is taxed as a partnership and both of you will get tax benefits.

While we are talking about partners and taxes, I wonder if the experts have any tips on specifically 'entity set up'.

We are going to be using a lawyer to  set things up, but wanted to get some feedback here too. 

My 'silent partners' will be bringing the down payments of 20-25% in either cash or SDIRA or SOLO401K funds. We will for some kind of partnership, most likely a LLC. I or my own LLC will do all of the finding, purcashing, PM etc.... and we will split all profits, both cash flow and equity build up, 50-50.

Are there things to be aware of when one partner brings NO 'equity' to the deal and how does that affect 'owners basis' down the road? We are going to also be talking to a lawyer that specializes in Retirement Account Law to make sure how to do things in that case. 

There is a VERY good chance that we would be wanting to add more properties to the partnership/LLC in the future, or that they might want to sell their LLC interest at some point vs selling off properties to 'cash out'.

Thanks, Dan Dietz