Skip to content
×
Pro Members Get
Full Access!
Get off the sidelines and take action in real estate investing with BiggerPockets Pro. Our comprehensive suite of tools and resources minimize mistakes, support informed decisions, and propel you to success.
Advanced networking features
Market and Deal Finder tools
Property analysis calculators
Landlord Command Center
ANNUAL Save 54%
$32.50 /mo
$390 billed annualy
MONTHLY
$69 /mo
billed monthly
7 day free trial. Cancel anytime
×
Take Your Forum Experience
to the Next Level
Create a free account and join over 3 million investors sharing
their journeys and helping each other succeed.
Use your real name
By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.
Already a member?  Login here
Tax, SDIRAs & Cost Segregation
All Forum Categories
Followed Discussions
Followed Categories
Followed People
Followed Locations
Market News & Data
General Info
Real Estate Strategies
Landlording & Rental Properties
Real Estate Professionals
Financial, Tax, & Legal
Real Estate Classifieds
Reviews & Feedback

Updated about 7 years ago on . Most recent reply presented by

User Stats

6
Posts
2
Votes
Aaron Friberg
  • Investor
  • San Diego, CA
2
Votes |
6
Posts

How to Structure a Promote from a Tax Perspective

Aaron Friberg
  • Investor
  • San Diego, CA
Posted

Hi all. We are doing our first flip where we are partnering with other investors. We've established an LLC. We found the deal and are managing the construction so the business deal is we take 25% of the profits off the top and the remainder of the 75% is distributed to the equity (we're also contributing 51% of the equity so we'll have an equity position as well).

Question is: for the 25% promote payment (before the equity gets paid out) we were thinking of structuring that as a fee to my wife (she's handling all the remodel) pursuant to a separate contract so that basically she is an independent contractor. With the $20k or so she'll make off the promote, she could then treat that as income and contribute it to a 401k (or SEP/IRA or whatever) to get tax-free money. Basically she elect in taxes to be a sole proprietor and use the promote portion for tax advantaged retirement income purposes. Downside is that we'd have to pay employment tax on that money if she treats it as sole proprietor income from what I understand.

Is it better from a tax perspective to just treat the 25% promote in the same bucket of funds as the distribution from the LLC we'll receive for our equity portion? My understanding is that under the new tax law, 20% of the gains of the LLC distribution (and promote if we threw it into the same bucket) wouldn't be treated as income, so maybe best to just throw the promote into the remainder of the equity payout instead of doing the independent contractor/SEP contribution route described above.

Interested to hear thoughts from tax folks.

Thanks all.

Aaron

Most Popular Reply

User Stats

1,264
Posts
978
Votes
Logan Allec
  • Accountant
  • Los Angeles, CA
978
Votes |
1,264
Posts
Logan Allec
  • Accountant
  • Los Angeles, CA
Replied

@Aaron Friberg This depends on your individual tax situation.  For example, if your wife's W-2 earnings exceed the Social Security wage base, the self-employment tax on Schedule C income would be limited to the (smaller) Medicare piece.  But if she doesn't have W-2 or other income subject to Social Security, then the self-employment tax would be a bigger downside.

Loading replies...