Need CPA insight on this deal structure/tax implications

[Jenny L.]

Looking to tax pros for their input on this -- thanks in advance for your help! We are trying to find a way to creatively finance a rehab and resell deal.

What we’re thinking would be structured like this:

Elderly mother currently owns the property outright. Three adult children have taken control of it. Our company would enter into an equity partnership with them, forming a new LLC. They would be 85% of the LLC, we would be 15%.

LLC takes out a HELOC for repairs. We (the rehabbers) use our GC for the reno. We rehab and resell the property, and split the sale 85/15. This way, they will end up with a higher return than if they sold as-is, and we save significantly on loan costs usually associated with flips.

The only thing they incur is holding the house for another 8 months and paying what they are already paying for prop taxes, insurance, utilities, etc. We split the HELOC interest/fees (or perhaps we, the rehabbers, pay it all).

Our tax question is, on a typical flip, your property is considered inventory, not an investment. What would a deal like this look like to the IRS in terms of profit on the sale of the house? Would this be considered a short term investment instead? Will the tax hit be greater than if we purchased outright? Our company would just be added to the deed, no actual purchase involved.

And what about the owners - would their tax exposure be greater, or worse, than if they had just sold it outright?