Informal partnership tax filing

[Graham Lawlor]

My uncle and I bought a building together and after a minor renovation we're flipping it for a decent profit

We're 50/50 partners on the project (we contributed equal shares of the capital/expenses and we'll take an equal share of the profit).

My name alone is on the title and all other documents. This was done in part because we wanted to save money setting up an LLC and partly because he is not a US citizen (he's Canadian)

Our initial thought was to have all the proceeds come to me, have me declare all the income on my personal income tax, and I will cut him a check for 50% of the post-tax gain

Accountants I've spoken with seem nervous about this setup. One fellow said it could trigger an audit. Another fellow said it could result in my uncle getting taxed again on his profit (even though I'd have already paid tax on them)

I'd appreciate any suggestions on how we should handle the situation to minimize our risk of audit, double taxation, or other issues

Thanks so much in advance!

Graham 

[Blake Meester]

Interesting questions… what is the agreement and who receives the economic benefit?

When two or more people enter into a for-profit venture and split the net profits you generally have a partnership for federal tax purposes. Along with this come the partnership tax filing requirements and tax rules. I would caution you to any plan that doesn’t end up with filing partnership tax returns and reporting the allocated gains/losses. The IRS is no joke and the partnership tax rules have stiff penalties for failure to file.

I would also point out that the IRS very much cares about the money “passed back and forth between you and your uncle”. Sure, it depends on the amount but there are income and gift tax rules for these transactions. It may be possible, with some planning, to structure the deal to lesson or eliminate the tax burden. You should consult with an adviser prior to the sale and see what can be done.