Specialist · Annandale, MN · Member since 2016 · 14 posts · 5 votes
Hi all,
Wondering if anybody offers up the depreciation from a potential new property to a private investor as part of the terms? I have a couple of investors that are looking to a.) park some money, and b.) find additional tax write-offs. For example, on a standard $100k SFH, with the 20% down payment coming from the investor, and a standard $80k bank loan, I am offering the investor either 50/50 split or 100% depreciation for the property, which allows me to get the property with zero-down, and allows the investor the tax write-offs they want. End game would either be for me to refi in 12 months to cash investor out and them repeat, or let it ride until the investor wants out.
This is definitely something you can do via the Operating Agreement or Partnership Agreement of the LLC/partner/entity. You can specify something like "all income and expenses are to be split in a pro-rata fashion according to ownership percentages, except for depreciation which shall be split as follows".
Then write up how you want that split. You can also specify things like: "Equity in the property due to mortgage paydown will go to X partner while equity in the property due to market fluctuation will go to Y partner"
Essentially, you can split income, deductions and gains in any manner you like, so long as you are cognizant of legal issues like usury laws, foreign taxation, etc.
The investor can't get the depreciation unless he is an owner, on title, and then just his ownership percentage share, and then he'd be reporting the income/other expenses accordingly.
@PeteEdmondson - depreciation is based on your ownership interests, and to the best of my knowledge, can't be assigned away unless the ownership is assigned away as well. Also, remember depreciation is "recaptured" on sale, thus if your investors are gaining the advantages of writing off passive income via depreciation, they'll be unpleasantly surprised when they owe the IRS a good chunk of the depreciation they took on property sale.
This is all based on my understanding of the tax code - but you want to verify all of this stuff with your CPA. If you dont have a CPA, then at the very least consult one as the last thing you want is pissed off investors suing you later on - and they may have a good case here if you didnt specify the risks or you misled them. Be VERY CAREFUL when dealing with "investors"
This is definitely something you can do via the Operating Agreement or Partnership Agreement of the LLC/partner/entity. You can specify something like "all income and expenses are to be split in a pro-rata fashion according to ownership percentages, except for depreciation which shall be split as follows".
Then write up how you want that split. You can also specify things like: "Equity in the property due to mortgage paydown will go to X partner while equity in the property due to market fluctuation will go to Y partner"
Essentially, you can split income, deductions and gains in any manner you like, so long as you are cognizant of legal issues like usury laws, foreign taxation, etc.
@Linda Weygant - thanks for correcting me with knowledge! That's exactly why you leave the important issues to experts!
So Linda, if he assigns the depreciation deduction to his investor and lets say they depreciate $50k of the house over a few years. Can they sell the property and assign the depreciation recapture to someone else? Or does the one who took the depreciation have to also "give it back" when the property is sold?
Obviously this gives an ownership interest to the private investor rather than just a lien position, but perhaps @Pete Edmonson is cool with that. Pete, please really consider what that means if your notion is to refi the investor out, because a partnership entity on title from the get go may turn off the end lender. Good luck!
Very very good info @LindaWeygant and @Aaron Pfeffer + others! It certainly appears that it isn't as simple needs as I first thought. I will keep walking down this road and reply back on what was (in my opinion) the best route to take to accomplish the goal of a.) Getting into a property with creative financing and b.) Using depreciation as a negotiating tool.