All Forum Posts by: Kory Reynolds

The difference often shines in these smaller entities in my experience - while there certainly might be someone who takes the lead and does 95% of the physical work, the person who provides the money in these situations very rarely has no management control. Day to day operations, sure, they may be completely hands off. Approving which contracts to pursue, where to put the money, exit plans, etc - might be high level management, but it starts to evolve things away from "solely" only the efforts of others, especially if the operating agreement provides  a level of management control.

It certainly can be an investment contract, but most often with a small 2 person partnership cash/labor partners it is not the case as the money man exercises a level of control over the operations by virtue of being the sole funder.

Allocating the losses purely on ownership while ignoring capital contributions may have issues with substantial economic effect. Not to mention, investors will likely not appreciate this approach where the sponsor takes losses off of their cash. It makes little economic sense for the investors to provide the cash to purchase the asset, and then someone else gets the deductions for that asset. Additionally, the carried interest will actually need basis to take those losses. Sure we can allocate debt to for the basis, but then when the project sells all that income comes back to fill in the gap. While partnership agreements can be extremely flexible, substantial economic effect needs to work. 

For setting up a syndicate, I would recommend talking with a good tax attorney. I have a handful of clients in ME that use Burnstein Shur for very complex partnership structure, not cheap, but they put out a good product. Where syndication often works worth big projects, well worth the money to set up everything proper from the start.

I am not an attorney, but it seems to me no need to invest through an LLC into the syndicate. It seems in a typical situation the syndicate will be an LLC, you already are a limited partner, you already have liability protection from the activity of the syndicate. Previously it may have provided a limited sense of anonymity, but now if your LLC is a single member, the K-1 is made out directly to you with your LLC information pretty much being a footnote. Depending on your state, you may even be providing yourself with unnecessary state fees to maintain your LLC to provide protection not needed.

Again, not an attorney, but perhaps one will chime in and give some thoughts. With all the syndicates I work with, certainly some investors use single member LLCs, but more often than not they invest directly.

You likely need a new CPA. You get a QBI deduction of an activity is an IRC Section 162 trade or business, as my colleagues have already stated. Some of the buzz words around 162 would be that the activity is for the intent of profit, and that it is regular and continuous. As already mentioned, in Hazard v Commissioner the courts decided that even a single family rental met the threshold to be a trade or business. It is a VERY low barrier to get across. If you are managing your properties, you are very likely all set. It sounds like your CPA is confusing 162 with being a qualified real estate professional under 469 - two very seperate and distinct tests.

The one rental area where the QBI is quickly lost is triple net lease, but even then for a landlord in the business of doing triple net leases, they could qualify for 162.

 Those prices are reasonable to me, in fact, quite cheap.  Your partnership would likely run $2,500-3,000+ at many firms. Tiered investments and multiple activity reporting, in multiple jurisdictions, will take time. Even more so if it isn't a jurisdiction the CPA works with often. Same with your personal return, likely $1500-2000 at many firms.

A trend I have been seeing - compliance work is becoming more and more complex each year - TCJA, CARES, Partnership audit rules, thus takes more time. CPAs have to charge more as a result, we aren't going to spend 25%-50% more time and charge the same rate.

 Disagree - I think often people are quick to think something might be a security when there is a cash partner and a sweat equity partner. In a small operation like this, most likely the cash partners have a fair amount of management pull, this the return is not solely from some else's efforts, but also is from their own efforts. Reference the Howey Test for determining if something is an investment contract:

"a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party,"

To the original poster - there are plenty of vanilla operating agreements you can find online, you can get one from Legal Zoom for very cheap. BUT.... Partnership agreements can be nearly as flexible as you want - if you can write it down, you can likely turn it into a partnership agreement. Maybe you structure it that he receives 90% of the cash distributions until he recoups his investment into a flip, then after that it is split 50/50. Maybe he receives a preferred return of 20%, maybe after he gets his preferred return and return of capital you get 90%...

Depending on what you want to do, definitely find an attorney that specializes in it - many many attorneys will provide you with a boilerplate LLC agreement, not near as many will be able put together a proper agreement for complex allocations.

This will likely be a state specific question. I am not an attorney and not experienced in this area, so I will just speak from my personal experience and not as a professional.

i live on a private road with 9 homes on it -  most of the road before you get to the homes is owned by the state, then there after some of the homes (not all) owns the land that the road is on, and there is an easement for each of these that allows for through access for the purpose of other people accessing their residence. For example, my home is near the end of the road, I own none of the road or associated easement, but it is fairly clear no one can restrict access to my home. But our access is not specific to x,y,z property owners. It may be a matter of specific state law - that parcel may be grandfathered in in some manner - were you previously preventing the owner of that parcel access to their own property? Would you bar said owner from accessing their own property to build a home, but not for going camping? In some states, especially when there is already am established easement to allow others to access your property, may be difficult to argue your reasoning of not allowing this person to access their property through the same easement. The easement is a right of access, not a right to control what is done on parcel 7. Especially if the new owner owns the beginning of the road with am easement you have been using for however many years to access your own property!

Also, I guess why so set against someone building a new home? Unless there is a business the added traffic to your private road would be non noticeable, and it is one more person to potentially share in the maintenance costs of the private road.

You cannot write off any of these costs as you purchase them. Land in a development sense could be treated as a deductible inventory cost, but only when it is sold. Same with buildings. I'm a rental scenario you get to take depreciation on the building, taking a small slice each year.

If you start buying rentals and they produce losses, unless they qualify to be grouped with your retail activity, likely they'll be considered passive losses that you''ll be unable to use against your active retail income.

In the end if you payed that much in tax, likely you made a respectable chunk of money (assuming all your expenses were correctly picked up), and the tax just comes due. With regular operating businesses there isn't many options to truly shelter income from tax, only structuring things to maximize things like the 199A deduction and minimizing Self Employment tax.

There is no magic bullet to wipe out tax by buying real estate, still takes the proper situation and planning for it to make an impact.

I would say keep it simple (relatively). Do what works. Create an LLC with your partners, come up with an iron clad operating agreement to protect yourselves from one another, and go out and invest.

The more complex it is, the more expensive it is to set up, and then and maintain each year - more tax filings, more fees. 

I guess this is all to say make sure you have a real concrete reason to make it complex. Complex structures can actually be useful, but for your situation with only a few investors pooling together... Keep it simple. One of the messier structures I am working with right now their tax prep fees alone will exceed $50k annually for the pleasure, nevermind the several hundred thousand they spent on attorneys fees to set things up. But with a $200m development...complex makes sense.

Agreed - my post is focused on 100% personal use. Once it turns into a partial rental, it does allow for at least a partial deduction of interest against rental income depending on the mix of use between personal and rental. Those rules get messy, so let us know if that is the case and the explanations can be elaborated on.