All Forum Posts by: Will Hodges

No, ordinary business income from a K-1 isn't capital gain and won't be eligible for the QOF exception. In addition to selling equity, the other way that you could get capital gains is if the entity you are invested in sold property that generated capital gain and these amounts were allocated to you on the K-1. 

@Cody DeLong You can create any type of arrangement you want so long as the other party agrees to it. Partnerships are extremely flexible when it comes to the sharing of economics. If you are bringing more by way of value in services, then it’s not a hard argument to make that you should be reaping more of the benefit. Now is that 70/30 or some other type of arrangement, that’s a question you and your partner will have to decide. 

 You could give him a "preferred equity interest" in the partnership as opposed to it being debt and they could still get the benefit that QOFs offer. To do that, you'd need to set up the waterfall/allocations to be something like the following: 

1. Return of Preferred Capital 

2. Preferred Return (i.e., whatever percentage you determine is best) 

3. Your Return of Capital (we'll call your interest common)  

4. Preferred gets X% of profits; common gets Y% of profits. 

This is one way to do it, but I don't think I'd structure it this way. I see preferred interests most of the time where one partner is bringing in the majority of the cash. In your situation, you are both bringing in equal amounts. Further, it sounds like you'll be doing most of the work in regards to finding deals. There are a few considerations to think about in regards to the services you are providing: 

Will you need/want the cash for your services immediately? If that's the case, then you can just put a number on it (i.e., X amount per deal or X amount per hour) and it can be paid out annually in the form of guaranteed payments. 

An alternate approach would be for you to take additional "back-end" upside that occurs as profits are generated or as your properties appreciate in value (and you monetize that appreciation). In the waterfall above, you'd essentially both share in the first tier the same (i.e., return of capital), you'd remove the preferred return tier and then in the last tier you'd take a larger percentage than your buddy since you will be providing more services. 

I believe Ashish is meaning that if you have $52k of capital gains on a K-1, but you haven't received the cash proceeds from the entity yet, then you can still invest $52k in total that would be eligible for QOF even if you pull that money in from elsewhere. 

I agree with J, but to the extent you do plan to create a partnership, there are a few ways to do it. In general, cash partners tend to reap more reward in these types of scenarios. You could do it like a lot of real estate deals and give the GC partner a promote/carry type interest. For example, the waterfall could work something like this: 

1. Cash partner receives initial capital back first. 

2. Cash partner receives x% return on invested capital. 

3. Remaining profit split 80 (to cash partner) / 20 (to "service" partner) 

I'd treat any equity given to the GC partner as their compensation meaning that they wouldn't get to double dip on charging for the reno and getting back-end upside. Alternatively, you can compensate them and then give them a smaller portion of the equity. 

 Haha no neither one - just wrote an example of how a QOF investment would work. 

Great summary. One thing that I would add is that if you have an investment in a pass-through entity (i.e., partnership, S corporation, estate or trust) and that pass-through entity had capital gains this year that they did not elect to defer (i.e., invest in a QOF), then you have 180-days from the end of the pass-through entity's taxable year to invest your allocable share of the capital gain amount. This is important to keep in mind as a lot of entities will extend their returns and won't issue K-1s until the end of the summer which by the time you received the information it may be too late. It might be worth requesting additional information from your applicable entities if this is the case. 

Mods - just curious why my post was removed? 

Taking into account the difficulties in PM within the state, what are the biggest pain points? 

It seems like a good opportunity to create a service that could add value for a lot of investors.

@Daniel Dietz Pending the objectives of both the remaining members and the exiting members, you can either structure this transaction as a sale of the exiting member's interest to the remaining members or as a redemption of the exiting member's interest by the LLC. There are a few nuanced differences between the approaches. One of the biggest considerations is in regards to unrecaptured section 1250 gain. If the interest is redeemed by the LLC, then the exiting member doesn't recognize unrecaptured section 1250 gain. This amount effectively shifts to the remaining members. If the interest is purchased by the remaining members, then the exiting member would recognize this amount.

Hope this helps and happy to answer any additional questions.