Real Estate deal with OPM and Taxes

Member since 2020 · 4 posts · 0 votes

My husband and I partnered with a friend to purchase our 1st deal. They put all the funds for the purchase and rehab cost. We agreed to split the proceeds after close. My husband and I did all the work and renovations. Should I open our own LLC so that the check be in the business name for tax filing purposes? He mentioned to discuss the taxes. Is it right that I have to pay any of his personal taxes for this deal? Can someone advice.

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Elizabeth Klingseisen

Investor and Real Estate Mentor · Boca Raton, FL · Member since 2016 · 177 posts · 33 votes

@Lisa Leon I agree. You should definitely talk to a tax accountant like Chris said, but I am going to share how we (my mother and I have been doing this.) My mother, @Laura Alamery, has been investing for over 30 years.

When we use partner with someone who is investing money in the purchase and rehab (some time they invest 100%, other times we do 50/50,) we create an LLC just for that particular property. We also file a mortgage note and deed of trust to protect their investment (basically we give them a lien on the property.)

When we sell the property, the title company receives from us an agreement on how to disburse the proceeds. The title company handles the disbursements. If the funds go in one account, like hours, we have to issue a 1099 at the end of the year for the disbursement of their portion.

Since the LLC is in both names, separate tax return is prepared for the LLC with the investment, purchase and disbursement (our CPA charges us $300 per LLC for tax preparation.) The LLC is then dissolved after the property is sold.

I hope this helps for general information, but please consult your tax accountant, because it depends on your personal situation and State.

@Lisa Leon

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Chris Teti
Realtor · Southern NJ · Member since 2017 · 188 posts · 68 votes
6y
I'm not accountant, so you should definitely speak to one. Especially if you are going to be getting into REI, you'll want a good one with experience working with investors. Your friend will probably 1099 you to write off the profits he paid to you, which means you will have to pay taxes on the profits you received from the deal.
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Lisa Leon
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Member since 2020 · 4 posts · 0 votes
6y
I figured a 1099. Would it be wise to open an LLC to have the check written to the business vs. my name. I'm not sure if this is accurate, but under an LLC you fall under a lesser tax than filing under self employed, etc. Is this a question for an accountant?
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Chris Teti
Realtor · Southern NJ · Member since 2017 · 188 posts · 68 votes
6y
Yes, definitely a question for an accountant. For this project my opinion is it won't matter either way. An LLC will flow right into your personal anyway, so it will be taxed the same way. Other types like S-Corp and C-Corps are handled differently. That's my understanding anyway. Might be different in your state, but definitely talk to your accountant about it.
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Elizabeth Klingseisen
Investor and Real Estate Mentor · Boca Raton, FL · Member since 2016 · 177 posts · 33 votes
6y
@Lisa Leon I agree. You should definitely talk to a tax accountant like Chris said, but I am going to share how we (my mother and I have been doing this.) My mother, @Laura Alamery, has been investing for over 30 years.

When we use partner with someone who is investing money in the purchase and rehab (some time they invest 100%, other times we do 50/50,) we create an LLC just for that particular property. We also file a mortgage note and deed of trust to protect their investment (basically we give them a lien on the property.)

When we sell the property, the title company receives from us an agreement on how to disburse the proceeds. The title company handles the disbursements. If the funds go in one account, like hours, we have to issue a 1099 at the end of the year for the disbursement of their portion.

Since the LLC is in both names, separate tax return is prepared for the LLC with the investment, purchase and disbursement (our CPA charges us $300 per LLC for tax preparation.) The LLC is then dissolved after the property is sold.

I hope this helps for general information, but please consult your tax accountant, because it depends on your personal situation and State.

@Lisa Leon
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Lisa Leon
OP
Member since 2020 · 4 posts · 0 votes
6y
Thank you so much for the insight. I see you are in Fort Lauderdale as I am too. I will take your recommendation and consult with a tax accountant.
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
6y
@Lisa Leon

If there is an agreement between you, your husband and a friend to split the profits of the flip, you should create an entity and have that entity file a tax return.

This will avoid the issue of you having to report all of the income.
Talk to an accountant and have this taken care of sooner rather than later.
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