Tax question on acquisition fee

7 Replies

I am in escrow on a commercial building for a value-add deal I am developing and will get an acquisition fee from the LP I am partnering with.  How is this acquisition fee classified tax-wise?  Is it ordinary income?  Or can it be classified as short term capital gains as I have not been in escrow for more than a year.

Any thoughts appreciated.

Originally posted by @John Kim :

I am in escrow on a commercial building for a value-add deal I am developing and will get an acquisition fee from the LP I am partnering with.  How is this acquisition fee classified tax-wise?  Is it ordinary income?  Or can it be classified as short term capital gains as I have not been in escrow for more than a year.

Any thoughts appreciated.

 With the limited info you have provided, Its an ordinary income.

What do you think if this acquisition fee was restructured to be more like a capital gain, i.e. I sell some portion of the property to the LP instead?

@John Kim

Might be a way to structure it more tax efficiently...

How big of an acquisition fee are we talking about?

There is a cost-benefit involved.  I imagine you'll be paying more professional consulting fees if you want to structure it optimally.

Originally posted by @Eamonn McElroy :

@John Kim

Might be a way to structure it more tax efficiently...

How big of an acquisition fee are we talking about?

There is a cost-benefit involved.  I imagine you'll be paying more professional consulting fees if you want to structure it optimally.

 200k.  I have some short term capital losses I'd like to offset and the taxes on this amount as ordinary income in my bracket will be hefty.

@John Kim

The tax rate on a short-term capital gain is the exact same as ordinary income.

What you're really worried about is SE taxes.

It's unlikely that this will be capital gain treatment.  Maybe a special allocation via a waterfall allocation schedule if this rises to the level of a partnership.  Not enough info here to tell...

Originally posted by @Eamonn McElroy :

@John Kim

The tax rate on a short-term capital gain is the exact same as ordinary income.

What you're really worried about is SE taxes.

It's unlikely that this will be capital gain treatment.  Maybe a special allocation via a waterfall allocation schedule if this rises to the level of a partnership.  Not enough info here to tell...

 That's what I'm curious about whether this fee could turn into a special allocation.  The short term capital loss is from stocks and hoping to offset that with this gain from the restructured acquisition fee.

Anyone else have thoughts here?

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