All Forum Posts by: Dylan Brown

Nothing taxable on your end would occur, you would have a tax free contribution of assets into a partnership.

would your ownership percentage in the LLC change after the contribution or would the other LLC owner make a proportionate contribution of cash or property into the LLC? If you answer no to both of those, it could be looked at as a gift of property to the family member since you would essentially be giving them real estate. In that case, a potential gift return may need to be filed but this is easily avoidable if you just structure the transfer correctly.

@Benjamin DeMuro – I can see where your CPA is coming from, and their approach is technically correct. However, based on your situation, I’d recommend pushing back a bit and explaining the specifics of your arrangement.

Most third-party property managers are listed as the main host on Airbnb or VRBO and will input their own banking and tax information so that all payments flow through them on behalf of the property owner.

Typically, the management company collects the gross rental income, deducts its management fee and any expenses paid on the owner’s behalf, and then remits the remaining funds to the property owner.

In this setup:

• You would issue a 1099-MISC to the owner for the full gross amount collected, not just the net amount remitted.

• Separately, you should provide the owner with a monthly or annual summary of all expenses paid on their behalf (including your management fee).

• This allows the owner to deduct those expenses against the 1099 income, effectively reporting only the net rental income they actually received from you.

• The owner would then deduct any other property-related expenses they paid directly (e.g., mortgage interest, property taxes, insurance).

From your perspective:

• You would only recognize income for your management fee and any expenses you paid directly that weren’t reimbursed from rental proceeds.

• You do not need to pick up the full gross rental income you collected on behalf of the owner.

• Likewise, you shouldn’t deduct expenses that were paid using funds that were ultimately remitted to the owner.

DM me if you have more questions!

@Nicholas Sanchez you're asking the right questions at the perfect time. The jump from house hacking to portfolio building is where proper structure starts to matter.

As a CPA who works almost exclusively with real estate investors and syndicators, I’ll add a few high-impact points to complement what others have said:

1. LLC ≠ Tax Strategy
   The LLC is a liability protection tool. From a federal tax perspective, a single-member LLC is disregarded (everything still flows to your 1040), and a multi-member LLC files a partnership return (Form 1065). The LLC itself doesn’t reduce taxes—it just helps you separate business from personal, which is crucial as you scale.

2. Refinancing & Lender Implications
   Transferring properties into an LLC may trigger the due-on-sale clause (though this is rare in practice). It doesn’t always happen, but it’s a real risk to understand before moving title. A land trust can sometimes be a workaround, but it’s not a substitute for a long-term plan.

3. Entity Planning for Scaling
   If your goal is to buy and hold long-term, you might consider a holding company (e.g., an Illinois LLC or an S-Corp parent) and separate property-level LLCs beneath it. This helps centralize your management, simplify accounting, and isolate property-level risks. It also makes partnerships, cost segregation, and passive loss planning much cleaner.

4. Depreciation & Strategic Tax Planning
   You’ll want a CPA who’s thinking in terms of grouping elections, material participation, and maximizing depreciation through cost seg. These strategies are how investors legally offset six-figure incomes with paper losses from real estate (or at least optimize their loss timing).

Your next step is absolutely to engage a real estate-focused CPA and a Chicago-based RE attorney who understand both liability protection and how to keep your tax filings clean. Don’t skimp on these two—when done right, it’s not a cost, it’s an investment.

Jeff - Happy to give you some pointers - I will send you a message.

@Austin Moore Sorry - try this!

https://tinyurl.com/repairflowchart

@Chris Seveney Your line:

"There are a lot of compliance issues therefore we engaged a broker dealer and a legit company to perform our annual audits"

Amen to that - well worth the cost I am sure.  If you invest with OPM (Other people's money) you really need air tight books and more than one set of eyes on everything.

Thanks for posting this - I have always thought this co-GP arrangement is such a sham.  Most of the "co-GPs" that I talk to wouldn't know a thing about operating a real estate asset and are merely along for the ride because they were able to cobble up a million bucks of friends and family money.

The private equity side of the real estate business has really been the wild west for the last 5/10 years!

"What is simply a repair and what do I need to capitalize?"
I get this question a lot.


Back in 2015, we saw lots of clarifications around this issue. Luckily, I don't need to reinvent the wheel to explain it, there is a plethora of publications out there on it. Here is the gist:

T. Regs. §1.263(a)-3 (2015 Tangible Property Regulations):

The general rule of Regs. Sec. 1.263(a)-3 requires that amounts paid to improve a unit of property must be capitalized. An amount paid is considered an improvement to a unit of property if it results in:
(1) betterment,
(2) restoration, or
(3) adaptation to or of the unit of property.

What does that even mean?

That is where it gets a bit complicated...

Rather than explaining it, I just linked my FAVORITE resource (published by KBKG - Tax Credits, Incentives & Cost Recovery way back in 2018) that I still use to this day. I even use this graphic to help train new hires!


^^^^^^^^

If you are a CPA, download it.

If you have a CPA, download it and send it to them.

This is low-hanging fruit for anyone that owns real estate. Don't miss deductions just because you or your CPA didn't know the nuance of the Tangible Repair Regs.

Why are GPs in R/E so fixated on receiving tax losses
When they should be focusing on structuring away earned income?



You only really need tax losses if you are trying to offset taxable income, right?

So why not just get rid of the income sources?



Obviously, its not that simple, but hear me out.


~75% of the syndicators and GP’s I talk to receive some form of acquisition fee for their services and often times use part (or all) of those fees to to re-invest into the deal.

What is tough about that is that the fee was taxable, but the taxpayer just invested the fee so they don’t have the cash left over to pay the tax.

Instead, what if the portion that they reinvested was actually re-structured to be paid out on the back end as a GP catchup in the waterfall instead of on the front end as a fee? If the GP didn’t need the funds and was going to invest them anyway, wouldn’t this be a no-brainer?

There is obviously a lot to this since the GP would want to avoid a scenario where the receipt of the partnership interest that entitled them to the GP catchup wouldn’t be taxable on day one.

That’s why you need a CPA that understands IRC Sec. 707, 83, and Rev Proc. 93-27 and 2001-43.

If done properly, the GP could defer income recognition to the back end and also convert it from taxable ordinary income into long term capital gains.

The catch here is that the GP needs to be willing to stomach the risk that the payout is now dependent on the performance of the asset. If the deal goes south, the GP won’t get any of the acquisition fee that they would have gotten otherwise. But hey, I know a million LPs that would actually see this as a positive and potentially agree to a higher fee knowing its only payable out of the projects upside!

Let me know your thoughts below. I included a snip from "Understanding Partnership and LLC Taxation" that is relevant to the discussion.

This is something that I think a lot of people get wrong.

Let's say you spend 100% of your working hours putting together funds for the sole purpose of using investor capital to invest in real estate.

You partner with sponsors that are running deals, and you are a co-sponsor (co-GP).

Your main responsibility is to underwrite, raise capital, and monitor performance. You are probably pretty savvy with real estate and may even have some prior experience being the lead sponsor on some deals in the past.

As a co-sponsor, you also have a stake in the property yourself, and you receive a K-1 with significant losses for the first year.

Unfortunately, you are just a passive investor like the rest of the investors in your fund, so those losses will not be offset against your other forms of earned income.

The crux of the issue here is that in order to make REPS status, you have to be involved in a real property trade or business which deal financing and underwriting does not qualify for.  The kicker is that if this is you, your hours actually count against REPS, not simply just tossed out.