How to calculate partnership split profits.

8 Replies

Hi I am new to this, a partner and I are looking to purchase rehab and flip properties In Houston.

My partner will bankroll the whole thing cash and that is it. I will be in charge of getting contractors to rehab and what ever else is needed.

If we were to split the profits 50/50 , how do I calculate the correct total profit . I know it can not just be as easy as  SoldPrice-CostofHouse-repairs = profit/2. I just want everything to be fair for my partner.  Taxes,agent ,ect. 

Thanks in advance

you split it 50/50 on the NET PROFIT. So after paying taxes, closing costs, commissions, rehab, utilities, insurance, buying side closing costs, and any addition costs, that's when you split your profit 

I assume you will be set up as an LLC or some form of business entity. You'll need to keep track of every expense (including things like vehicle expenses, interest, lawyers, accountants, permits, tax preparation, LLC organization fees etc.) and if applicable, keep track of expenses relating to different projects separately. Basically every dollar spent will be a business expense and every dollar received will be income and the difference after all the dust settles is your profit to be allocated. But from a tax perspective things get tricky and you'll want to work with an accountant even before you start anything in order to really know what you can expect.

Title the property in a trust with both partners as 50% beneficiary, distribute the proceeds at closing at 50% each and keep track of all expenses and who paid for what then settle up on expenses whenever you feel like it. Quite simple actually.

Hi it's been a while since I posted this.  I will be possibly doing it with a different person and my question is how do taxes get calculated? is this like a once a year thing like income tax? or is that something that can be calculated right after selling the property and figure out the profits for each party?

Simple answer would be once you accounted for all income and expenses and determine the net profit, you can distribute that to each partner and then at the end of the year each partner would report their share of profits on their own individual tax return. Just remember not to spend all your profits because you'll likely owe taxes on it when you do file your taxes. I think that answers your question. But knowing how much your taxes will be and how they are calculated is another story (could be investment or could be self employment). And knowing your other potential filing requirements, such as LLC tax return if you set up an LLC, is yet another story.

Hi @Kevin M. , can I ask a question about the transfer of property into the LLC?

I'm considering a deal like Tuan described, where I would bankroll the flip while my partner manages the flip. The intent would be to share net profits 50/50. 

Let's say the property will cost $100k and we estimate other expenses will range from $50k-$60k. 

We set up ABC LLC, of which we are equal members.

I then go out of pocket $100k to buy the property. When I transfer the property to ABC LLC, what does the LLC give me, such that it's clear I am not just gifting $50k of equity (1/2 the property value) to my partner? It seems like ABC could give me a promissory note for $100k in exchange for the transfer of property. If we go that route, would I need to charge the LLC a market interest rate, even if my preference would be to structure this as a zero-interest loan?

The way I've done it is I contribute cash and then buy with the LLC. And I wouldn't consider myself an expert but if you contribute property instead of cash, your contribution is equal to the value of the property not necessarily what you bought it for so it's important to know the value of what you contribute so only the gains are split 50/50 if you thought it could be worth different than what you bought it for. But either way you have lets say $100k equity afterwards and your partner has zero. That is what you get back and therefore a loan is not necessary in my mind. Your partner through ownership in the LLC can still be considered 50/50 owner of the property but not like your partner is $50k richer off the start. Because if you lets say liquidated the partnership the next day and sold the house for $100k you'd have your $100k back and your partner would not get anything. But by contributing to the LLC you are transferring ownership from you to the LLC which you only have 50% ownership so it may seem like your giving $50k away but you're not.

Disclaimer: I'm not an attorney and this isn't legal advice. 

@Ethan Anderson

First, keep the LLC as a single-member LLC. That keeps you in control as you are 100% funding the purchase and construction costs. It also makes taxes and other filings easier vs. having an LLC with partners.

Second, buy the property with the LLC vs. buying it personally and transferring it later. It seems like unnecessary work and expense to do the latter. Plus you have better asset protection by keeping your personal name out of it.

Third, sign the other guy on with a independent contractor agreement. This can spell out all of his responsibilities and what he will get paid at the end... even if payment is shown as 50% of the net profits. Meaning you don't have to write an actual dollar amount into the agreement. 

By doing the above you should be able to avoid promissory notes, deeds of trust, and transferring properties between persons and LLCs.

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