Structuring partnership exith with cash buyout

3 Replies

Seeking guidance on how best to exit a partnership mid-flip and the tax implications I should prepare for.

Detail and timeline

  • I bought a duplex in January for cash - standard closing with the buyer
  • In May I let a partner buy into the deal with cash and had his name added to the deed
    • there was no recorded transfer of $$ at this closing
  • My partner is now offering additional cash to buy me out of the partnership and take over 100% of the deal

Hoping to better understand at a high level what the typical path forward would look like in this scenario ?

I'm not an expert on the tax part, but it sounds like this would be short term gains if he buys you out. I believe, if you want to be bought out, you can just record the sale like any other. Probably you need an attorney to make sure everything is square.

Originally posted by @David Roberts :

Seeking guidance on how best to exit a partnership mid-flip and the tax implications I should prepare for.

Detail and timeline

  • I bought a duplex in January for cash - standard closing with the buyer
  • In May I let a partner buy into the deal with cash and had his name added to the deed
    • there was no recorded transfer of $$ at this closing
  • My partner is now offering additional cash to buy me out of the partnership and take over 100% of the deal

Hoping to better understand at a high level what the typical path forward would look like in this scenario ?

 For tax purposes, a partnership interest is treated as an asset separate and apart from the partner's indirect interest in the partnership's assets. 

For a high level, 

when you sold your partnership interest, you generally determine the taxable gain or loss, its character (ordinary or capital), and holding period (long-term or short-term) by reference to the partnership interest—not by reference to the underlying partnership assets.

Get a professional, please. 

@David Roberts

What @Ashish Acharya said is of course correct, but is also highly complicated.

Considering that the entire deal started and ended (for you, I mean) within 2018, and no partnership returns have been filed, you may consider cutting corners and treating the deal as 100% your partner's for tax purposes, especially since the eventual sale will be reported under his SSN.

On your end, you will report the difference between the total payout you received from him and your total investment as your taxable income. It could be business income (Sch C) or short-term capital gain (Form 4797), depending on your involvement and your other business activities. The difference between the two treatments is whether or not you pay the 15% self-employment tax on your profit.

Still, I side with Ashish in recommending professional help, as my suggestion needs a more detailed discussion before implementing, with a few pitfalls to address. 

Ideally, it also needs to be coordinated with how your partner is going to treat the deal - sending you a 1099 etc.