Tax question for Joint Venture Rehab for SFR

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Tax question for Joint Venture Rehab for SFR

Chris Cabanilla
Flipper/Rehabber · Las Vegas, NV · Member since 2018 · 18 posts · 2 votes

I’m in a situation where my in-laws and I have agreed to split profits upon the sale of their house in Orange County, California. I would put in the rehab money to renovate their house. And upon the sale of the house they would keep $400K, and I would get the remaining profits.

which would be better in terms of saving money from tax purposes?

1) have them quitclaim the deed to me so I am added to the title and have escrow disburse the funds according to our instructions? Or

2) upon the sale of the house, just have them write a personal check or wire me the money?

Thanks!

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    7y

    @Chris Cabanilla

    Is this property their personal residence? They may be eligible to exclude a portion or all of their gain on the sale of the house if yes. However, you being added to the picture does make things more complicated and likely less tax favorable.

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  • Chris Cabanilla
    OP
    Flipper/Rehabber · Las Vegas, NV · Member since 2018 · 18 posts · 2 votes
    7y

    @Basit Siddiqi

    Yes this is their personal residence that they’ve lived in for over 50 years. Thanks for your prompt response!

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    7y
    Originally posted by @Chris Cabanilla:

    I’m in a situation where my in-laws and I have agreed to split profits upon the sale of their house in Orange County, California. I would put in the rehab money to renovate their house. And upon the sale of the house they would keep $400K, and I would get the remaining profits.

    which would be better in terms of saving money from tax purposes?

    1) have them quitclaim the deed to me so I am added to the title and have escrow disburse the funds according to our instructions? Or

    2) upon the sale of the house, just have them write a personal check or wire me the money?

    Thanks!

    Are you going to do more of this with them? Then, may be treat this as professional transactions. 

    But, you can get most out of this transaction if your in laws sell this house as they will pay no taxes up to 500k in gain. 

    They can write a check to you and treat that as a gift after it is sold. Gift is not taxable if they have not gifted $22M so far. You can treat initial renovation cost as loan to your in laws. 

    You selling the house  will probably incurr 15% capital gain tax or might even be considered ordinary income subject to self employment taxes.

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  • Chris Cabanilla
    OP
    Flipper/Rehabber · Las Vegas, NV · Member since 2018 · 18 posts · 2 votes
    7y

    Thank you for the detailed response! No, I am not going to do more of this with them. This was their primary residence for over 50 years but has been a fixer-upper type of home. The ARV is around 575K. They would keep 400K and I would keep the rest. Assuming it sold for 575K, they would pay taxes for 75K despite the fact they would write me a check for 175K?

    What significance does treating the renovation cost as a loan entail? 

    Thank you!

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