How to invest with family?

[David Pendergraft]

BP,

We are buying a rental property in Seattle, Washington and our family would like to invest with us. They will be giving us $50k towards a $600k property. It is not a "gift", they want their share of the income and appreciation when we decide to sell. We can't put the property in an LLC because we don't want to risk the due on sale clause with the mortgage. We also would like to avoid them being named as an owner to prevent them from any liability (though an umbrella policy may be the solution to that). And, I think it would be easier from an accounting prospective if everything ran through our return and we could just give them a distribution of net income.

- Is there a way to structure this investment as a loan that has a variable rate based on net income and then some sort of balloon payment when sold?

- I presume it would be fraud for them to use their annual exclusion gifts to give us the cash, and then for us to use our annual exclusion gifts to "gift" back an amount equal to net income and then to "gift" back an amount equal to their share when the property is sold in the future ?

I would really appreciate you sharing any thoughts or recommendations you may have.

Thanks, 

David