Ways to Unequally Split Profits?

[Sean Imfeld]

So here's the deal: My mother (the money) and I would like to buy some properties together, with any rent profits distributed unequally to us both (let's say 90/10 in favor of my mother), with the understanding that this will change to more of a 50/50 split in a few years. I know LLCs may not be very necessary or useful when first starting out, but is there any other way to split profits unequally like we want? Can we just split them up ourselves without an LLC, or would that create tax issues? All discussions I've managed to find have focused on even profit splits.

Any help would be much appreciated.

[Daniel Chang]

You can split profits any way you want.  As long as there's a valid reason to do so and the goal is not for decreasing of tax payments.  In your case, since your mom is fronting most of the initial capital, then there's very valid reason why she gets 90 to your 10.  It however becomes an issue if the following year, your mom wins the lottery putting her at the maximal tax bracket, and you change the split to 90% in your favor in order to minimize the taxes (for instance).  

I agree to have an agreement that documents the contribution and the split, and to adhere to this.  If there is going to change in split in the future, document down what is expected, and what it takes to achieve the change.  If you are 90/10 for 5 years, and all of a sudden change to 50/50 without a valid reason, the IRS may question if they audit.  

What you may have to watch out for is that if you don't put down any capital, your 10% split may be categorized as self employment income, which would be subject to self employment taxes.  In essence, your 10% split comes from your "sweat equity".  While the rules behind this is murky, this is where I would consult a tax professional.