Partnering with high w-2 income on multi families?

[Mike Curadossi]

Hello Everyone,

So I just lost out on a great 3 family because I couldn't make a 1031 exchange work with the sale of one of my existing rental properties in time.  It made me think of other creative ways to potentially buy so I don't miss out on another deal that would have positive cashflow of approx $2,500 a month.....

I was talking with a friend of mine that makes $400k plus a year and he was telling me he gets killed every year in taxes and needs a way to shelter income.  I have been thinking of this strategy for a while but not sure if/how it would work...

Here is what I am thinking...

Partner 50/50 with a high w2 income individual in and LLC.

Partner pays 25% down payment to purchase property and in return gets:

- Write off all expenses (including maintenance, mortgage interest etc)

- Write off all depreciation

- 50% of equity

I would get and responsibilities would include:

- manage property and tenants

- manage all maintenance and renovations

- do all billing, collect rents

- I would get 50% equity and all income from rents

The only downside for me would be that I would show a lot of income on the property that would be taxable, but who cares its money I wouldn't be able to have if I didn't buy the deal.  My partner would be able to claim all the write offs investors get from owning property and lower his taxable income while having the future benefit of equity growth, mortgage pay down and appreciation.  If we get a decent amount of these, we could get his taxable income way down.  Not exactly sure what his return would be percentage wise but this completely hands off investment may be worth it to him?

Thanks in advance for the help.

Mike

[Luke Klaiber]

@Mike Curadossi

Not sure if this is really to the point of your OP, but figured I’d chime in—feel free to ignore if you know all this already. As @Christopher Smith stated, you'll want to get the advice of an attorney familiar with the tax code in drafting the operating agreement for the LLC if you opt for special allocations. Without getting too far into the weeds, special allocations are basically those allocations that deviate from the general rule that allocations follow ownership percentages. Special allocations are permissible so long as they have "substantial economic effect." The good news is that there are safe harbors that you can satisfy when drafting the operating agreement under which the special allocations are deemed to have substantial economic effect and will be respected by the IRS. These types of allocations will likely also have an impact on cash distributions at the liquidation of the LLC, so it's best to work through the long-term implications to make sure the deal doesn't have any unexpected cash consequences down the road.

Disclaimer: Although I am an attorney, I am not your attorney. This post does not create an attorney-client relationship. You are encouraged to seek legal advice specific to your situation regarding the subject matter of this post.