How to structure a flip with a partner through an LLC

Question

Hello I'm sorry if this has been asked before but I haven't seen anything on my specific case.

Me and another GC friend of mine want to flip a house together. He already purchased the home a few months ago and the title is currently in his own name.

-He approached me to do the flip together and split profits 50/50

-We opened a LLC together 50/50 partners

What is the correct way for me to reimburse his down payment and transfer title to the LLC?

Do I write him a personal check for 50% of his down-payment, then he goes and transfers title to the LLC?

What is the correct way to do this with the best tax benefits?

Sorry if this seems obvious, I'm not a financial expert and just want to be sure we do this in the least confusing and most tax beneficial way.

Thank you for your help!

Michael Plaks · Answer

@Emil Degan

There is no "tax beneficial" way to do it, assuming it goes according to the plan. And the way I understand your plan is:

• you split all costs 50/50
• you both participate in the process hands-on
• you will end up making a profit

At the end, each of you will owe taxes on 50% of the profit, no matter how you structure it, short of complicated corporate structures that I would not recommend at this stage and without knowing your full situation.

Which, by the way, is why @Eamonn McElroy suggested that you hire an experienced tax professional, and I concur.

He also suggested that you hire attorney(s), and I cannot agree more. Trying to jointly do any deal, particularly a high-dollar deal like yours, requires serious legal support. It will minimize a chance that you would lose money on this deal and/or ruin your friendship.

Here is an incomplete list of what you will need, and most of that requires an attorney's help:

• write a strong operational agreement for your LLC, covering numerous what-ifs
• transfer the ownership to the LLC, either with a deed or with one of the alternative methods
• convert the responsibility for the loan from him to joint
• arrange that your insurance will accommodate the ownership change
• establish operating procedures, including resolving decision deadlocks
• set up a solid bookkeeping system

I cannot tell how experienced you guys are with flipping, but a warning is due: over 95% of first-time flips lose money. The more extensive the rehab, the more difficult it is to succeed and make a profit.

Hopefully you will be an exception to this sad statistics.

Eamonn McElroy · Answer

@E Degan

You're asking simple questions about a complex multilayered nucleus.

What are both of your needs, wants, and resources regarding the venture?  What are both of your individual tax circumstances?

Everything is open to negotiation.

Ideally you'd both have attorneys and tax CPA/EAs to consult for this new venture.

Emil Degan · Answer

@Eamonn McElroy Thanks for responding,

I guess what I'm asking is there something clearly wrong or an obvious thing we should do differently with our current plan before we commit to it or does it seem like a reasonable structure/approach?

- The home is 260k

- He put down 26k down payment and has spent about 4k in A&E already

- I would pay him person to person about 15k to get the ball rolling

- He would have the title of the home transferred to the LLC.

-We would both put an equal amount of cash as needed into the LLC account and use that money for the construction cost (This will be between 200-300k total split evenly)

-When we sell the home (estimated 850k) we pay the remaining loan, and pay ourselves out the full the profit 50/50