50/ 50 Split ..Is it really a split.. I need objective view

17 Replies

I would like some advice on a 50/50 split project.
I put up the money on a single family home rehab with a family member that is a general contractor.
I paid cash for the house 192K and we estimated about 80K remodel costs. The original mortgage had a clause we had to hold the house for 12 months before it could be sold again and a first time home buyer had to be on the mortgage so we were able to get the house with his 1st time buyer status. After the 15 month rehab was done he was signed off the mortgage and the house reverted just to me to be sold.

We sold the house after 7 days on the market in June, for 410 K after closing costs.
So far I’m showing a pre tax profit of 76K.
We had 143K in repair costs breaking down to materials of 78K ,and labor as (59K) subcontractors required 25 K that I paid,, and 34K that he paid out of the draw.
I had been giving him a draw during the project that he used partially for materials and the rest was going to him I thought. I knew he had some labor type guys working as he was hardly ever there and he had said he was using them, because they were so cheep he could get more $$ doing other projects.
.
My agreement with him was “ he was to provide all labor except required contractors”. He gave me a printout of 34K he spent on guys for labor. And now still wants to split the profits. I don’t think that’s correct I told him if I had wanted to use all subcontractors I wouldn’t have agreed to go into the project with him at all.
Am I crazy..
What do I own him ?
Do I withhold from the profits an estimated capitol gains tax before the split also? And then calculate the split after that?
What do I consider the final profit, after I pay his split or before I pay his split. He is a cost so I would think after his cost, than it would be final profit split.
Any suggestions on how to figure this out would be greatly appreciated.

What does your written agreement say?

Joe Gore

Requires contractors is pretty vague. Tough to say what that means. Does your contract with him mention what parts of the construction he was responsible for and what parts he wasn't. To you this May of meant everything outside of electric, plumbing, etc. To him it may have meant he was to be the project manager and all hired help would be expenses shared equally. You mentioned you knew he was hiring other laborer to complete work. Did this issue not come up then.

Wow, where to start.

You're unlikely to like my answers.  Sorry, not trying to be harsh, but there is your warning up front.  And I think neither of you did well in this deal.

First, I think you owe him $38,000.  You put up the money, he but up both trade labor and his general contractor expertise, you agreed on a split.  "Provide the labor" doesn't mean do it.  

Second, and I assume you know this, there are all sorts of things wrong with the way you structured this.  And the way you both managed the project.  I'm not a flipper, but I could flip a house in one hell of a lot less than 15 months.  I understand that there was maybe not a lot of urgency because of the 12 month restriction, but it still should have been ready to go on the market at 12 months plus 1 day.

Third, I assume the mortgage you are talking about that required his first-time homebuyer status was a HUD rehab? Pray to whatever gods you honor that they never look too closely into the details of your project.

Fourth, because of the way you structured the ownership, you are likely on the hook for the capital gains, not him.  He has income.  But you get to pay the capital gains just on your half of the money.  Consult a CPA.

Fifth, you could have made more money more simply with less risk in less time.  And so could he.  Yes, he made roughly 25% as the GC, and doesn't make that usually.  But he makes close to it, and he had risk here, and a 15 month project.

You mutually made a bad deal for both of you.  But you also both performed on your respective parts of the deal.  Give the man his money.

Since my original post I talked with my accountant, and my contractor. We are working out the details. I knew going into the venture I would be responsible for capitol gains. 

Our agreement / contract was vague as to " will provide labor" . The total labor costs are still part of the project and basically comes out in the end between us. We did have on going discussions about labor costs, as I was fronting all the draws, he did step up and perform more labor himself, but it could have been a larger share. He would have benefited also. 

 Yes, we should have been able to have sold it the day after the 12 month holding period. We started the project with the option of keeping the property long term, but another property I was in contract with folded so it didn't stay any longer as a long term holding option. Yes, it should have been completed earlier and we would have saved 3 months of holding costs, I did have a % penalty that will almost off set that margin.  The market at that time may have been softer, because we had such a hard winter.  I guess in the long run we both have learned what it's like working together and the overall project was a success. The property sold and a profit was made and lessons were learned.

I appreciate your comments and advise, during the process I learned more about this type of investment.

I'm not seeing any capital gains tax here, for anybody.  This wasn't intended as a long term investment, regardless of a 15 month holding period.  Apparently you didn't rent it, and it wasn't anyone's primary residence.  It was a 15 month flip, ordinary income.

I'll have look into that capitol gains vs ordinary income further, the house wasn't liveable during the rehab, no one lived there for the entire time. Thanks for your reply.

It was huge job we took out a in ground pool, and excavated for a walkout patio to the backyard where the pool area was. Re landscaped the entire back yard. The house was a cat house,that's why we got it at a good price. It was treated with just about every product we could find for the urine odor. We completely sprayed the entire 1st floor with BIN and inside the floor joists before putting down new sub-floor. We also used a ozone machine, and lots of respirators !!

I'm still not sure I understand some of the details on this. Your initial post said you paid cash for the house. But then there's a mortgage that has some owner occupant stipulations. 

What was your actual out of pocket on the funds you put up?

And don't forget, when you pay him his half, you should report that as some sort of distribution or expense. So that should limit your tax to whatever your actual profit was (37k or whatever).

Let him deal with his own taxes on his share of the profits.

Yes, I paid cash for the house, but it was Titled in both of our names for about 15 months, until the project was completed and a week after that I had it on the market, and we had a purchase agreement 7 days later. (There was no mortgage.). I put up all the cash and paid all the costs during the project I paid for it all. He was given a draw.

Actual costs materials, utilities, taxes, combined labor was roughly 143K, not including purchase price. We made about 78K on the project. So out of his split he's now agreed to a 30% percent concession on labor he paid out of the draw I had given him, so that to me is much more realistic. He should have been at the job site more so he knew what was going on, keeping more involved with the people he had working. When the cat's away nobody gives a hoot.

He will get a 1099 on his half, so he'll be responsible for his own taxes.

Originally posted by @Deanna McCormick:

Since my original post I talked with my accountant, and my contractor. We are working out the details. I knew going into the venture I would be responsible for capitol gains. 

Our agreement / contract was vague as to " will provide labor" . The total labor costs are still part of the project and basically comes out in the end between us. We did have on going discussions about labor costs, as I was fronting all the draws, he did step up and perform more labor himself, but it could have been a larger share. He would have benefited also. 

 Yes, we should have been able to have sold it the day after the 12 month holding period. We started the project with the option of keeping the property long term, but another property I was in contract with folded so it didn't stay any longer as a long term holding option. Yes, it should have been completed earlier and we would have saved 3 months of holding costs, I did have a % penalty that will almost off set that margin.  The market at that time may have been softer, because we had such a hard winter.  I guess in the long run we both have learned what it's like working together and the overall project was a success. The property sold and a profit was made and lessons were learned.

I appreciate your comments and advise, during the process I learned more about this type of investment.

 You are not responsible for capital gains. You are responsible for ordinary income.

You flipped the property regardless of your holding time it IS a business transaction, not a capital gain. 

Steven, Thanks for your reply, good to know it's not going to be at the capitol gain rate. I appreciate your input. 

@Deanna McCormick  , I'm not sure you understood,,you WANT capital gains, but instead this will be taxed just like ordinary income, including social security and full taxes on the money,,,

Your intent was to flip it,,and you did, and you will pay the higher taxes as outlined by Steven

Split the profits 50/50 and never do a deal with a family member again. Chalk it up to a lesson learned.

Originally posted by @Deanna McCormick:

Steven, Thanks for your reply, good to know it's not going to be at the capitol gain rate. I appreciate your input. 

 Wouldn't you RATHER it was at the capital gains rate?

It's a lesson learned, and all under the bridge now. 

Yes it would be better as capitol gains rate.

My accountant had said it would be capitol gains rate, 

It was my error,  on response to  post by Steven

Join the Largest Real Estate Investing Community

Basic membership is free, forever.