Tax Implications of Equity in LLC in exchange for Sweat Equity?

[Coleman Nelson]

I am partnering up with a couple guys who have a successful rental real estate business. I will become a member of their LLC in exchange for the work that I will be performing managing all of the rental properties. I will not be contributing any money to the LLC in exchange for the equity. I recently found out that I will likely owe tax on the FMV of the equity that I receive in the company.

The plan is that I will get 33% equity, vesting over 3 years.  So the beginning of year 1 I get 11%, then 11% in year 2, and 11% in year 3.  If I understand correctly, I will have to pay tax on the 11% equity in year 1, then 11% in year 2, and 11% in year 3.  Alternatively, I can pay tax on the 33% in year 1 if I file election  83(b).  I guess doing this is good if I expect the equity to increase over the next 3 years so I'll be paying on today's equity instead of the increased equity in year 2 and year 3.

Has anyone had any experience with this?  Any insights or advice that you can share?  That's going to be a big tax bill, especially if I pay tax on all 33% up front.  But if the business grows substantially in the next 3 years, it could be worth it to pay it up-front.  Also, if you know of any alternatives, please let me know.  Thanks in advance for all of your help.