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Updated about 1 year ago on . Most recent reply

User Stats

20
Posts
16
Votes
Quincy Mingo
#3 Rehabbing & House Flipping Contributor
  • chicago
16
Votes |
20
Posts

Purchase 3-unit from Business Partner (Buyout and Capital Gains Tax Liability)

Quincy Mingo
#3 Rehabbing & House Flipping Contributor
  • chicago
Posted

I own a 3-unit multi-family with a business partner. The mortgage is in the name of my business partner. The interest rate is 4.5. We put 5% down when we first purchased it in 2019. The loan is not assumable. I want to get the mortgage in my name and buy out my business partner. The current owed amount on the property is $407,000. The current market value is roughly $600,000. We have an Operating Agreement, that states I can buy him out.

Reasons for the buyout

  • Business partner wants out of real estate
  • To put the mortgage in my name and renovate to have as a primary residence
  • Low Cost purchase of the multi-family over buying anything on the current market.

Possible Solutions I See

  • Purchase the property from my partner with a new mortgage:
    • My interest rate would be market, anywhere from 6.5 – 7.5% rate for primary residence either using FHA, Conventional, 203K. Purchase price would be the current owed amount on the property. If possible, not use an agent, to lower commission owed expense (not sure if this is possible in Chicago, IL). From a purchase and tax standpoint, I would operate the business expenses as usual in the name of the LLC as previously done. Buyout my business partner with an agreed upon amount soon after the closing and change LLC to single member. Next year file taxes for the LLC with it now being a single member LLC. This is so neither of us would have to pay capital gains on the sale since it actually stayed as a property for the LLC, my business partner was just bought out. I would dissolve the LLC the year after the property purchase is seen on the return.

Please share thoughts about my idea and if there are better alternatives or details I am missing. I am working with my accountant and CPA to ensure this works and the have suggested this path forward.

  • Quincy Mingo
  • Most Popular Reply

    User Stats

    20
    Posts
    16
    Votes
    Quincy Mingo
    #3 Rehabbing & House Flipping Contributor
    • chicago
    16
    Votes |
    20
    Posts
    Quincy Mingo
    #3 Rehabbing & House Flipping Contributor
    • chicago
    Replied
    Quote from @John Warren:

    @Quincy Mingo you should disregard advice from out of state folks about not using an attorney. An attorney will do something like this for $600-700 and will make sure you do this right. This is not a state where the title agent will do this for free.... because the attoreneys are the title agents. 

    You got a lot of advice from @Zack Karp who is a lender you can trust in Chicago. Zack and I have done deals together, and he is a strong, creative lender who knows investing. 

    My only high-level criticism here is that you are wanting to buy the partner out for what is owed. Why wouldn't the partner want to go to market and make money on this deal? It seems you all have done well here in terms of a smart investment that has appreciated. 

    Lastly, as an agent you 100% don't need an agent if you are doing an internal buy out in a partnership. We agents often times add a lot of value and earn our keep by helping you maximize the sales process, but what you are doing is something that needs an attorney. If you need a good, affordable attorney I can PM you one that I use regularly. 


     I would say I am the one who doesn't want to sell since I want to keep the property. I would be interested in building out the basement to duplex down and live in it. The area and property actually checks all of my boxes for safe neighborhood, close to downtown, nice unit and yard, etc. I would take the hit financial if we take this property to market and I have to refinance or purchase as a new property.  

    Thank you very much for your expertise!

  • Quincy Mingo
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