Tax implication on partner split at sale of property

[Aaron Scott]

So I'm going to lay out the situation the best I can and ask advice. First off, I'm in Alabama. Myself and a partner went in as partners on a flip deal, where he bought the house and we split the costs of rehabbing. I did about 1/2 of the work and took sole responsibility for contracting out any other work that I didn't have the time to do on my own. Since were early on in our partnership, where we're still figuring out the proper structure, profits were to be split 50/50 at sale of property and I basically agreed to not be paid for my time/labor (although it is partially accounted for in the profit split). Not that this probably matters, but this is work outside my normal day job, so mostly all afterhours and weekends. House is done and sold for a successful profit. We did not form an LLC or other entity, and yes I understand things shouldn't be done the same as we did on this one in the future. My real questions is as follows: Since we split the rehab costs and agreed to split profits, my partner first wrote me a check to reimburse me for rehab costs that I had in, and then a separate check that covers our 50/50 split of profit but basically wrote the check out as payment for my work on the house instead of stating it was a profit split. Speaking in terms tax implications, I guess my concern is that it might be treated differently if shown strictly as profit vs payment for labor. There may be no difference, but I wanted to be sure before tax season gets here. I plan to talk to a local CPA if needed (and of course when taxes need to be done), but so far am having trouble finding those with real estate backgrounds, at least by recommendation by those I trust. Thanks for any help and sorry for the long winded topic!

[Brandon Hall]

@Aaron Scott if you had no equity in the deal, it will be a lot easier to pass off as a sole proprietor, which in your case I believe will be advantageous (again, haven't seen all facts and circumstances so can't say for sure). 

Some things you will want to do, literally within the next week: 

(1) Most important: get a CPA;
(2) consider utilizing retirement plans available to sole props to defer taxable income;
(3) gain a full understanding of the business deductions available to offset your earned income and documentation requirements; and
(4) gain understanding of whom you may need to issue a 1099 to and what you need in order to do so.

@Percy N. flips are always subject to ordinary income taxes, regardless of how long they are held. Additionally, flips are considered inventory and therefore excluded from capital gains taxation (both short and long). Hope this helps!