Passive Income Tax Status for New Construction?

[John Michael Roberson]

I have been in talks with a GC in Georgia and his method of building is: He builds everything at costs and doesn't include any markup or fees, he oversees everything, I only supply funding, and we split 50/50 the profits after paying back the bank and all other associated fees.

Since I am only supplying the funding for the deal, is there a way I can structure doing this so that this is considered passive income for myself since I won't be involved with the construction or overseeing the project? I have some rentals and have more depreciation than what they rent for so if I was able to classify the new construction as passive income, I could then use the "losses" from my other passive investments to help offset the income. For additional reference, I live in TN. Married, both W2 earners at 225k combined. I fully plan on 1031-ing every property I ever own as a rental, so I'm not concerned regarding depreciation recapture.

[Kory Reynolds]

As long as you are not a "material participant" in the activity, then it will be considered Passive. To do that, as long as you don't hit any of the standard tests (just google "material participation tests" to find the 7 tests), you are passive, and you can offset that income with your other passive losses.

It will all come down to the nature of your involvement.  If you are truly just writing a funding check, and collecting a check at the end, most likely you'll be considered Passive.