Tax advice on my first flip with a partner

[Carlos Salazar]

Hey BP!

Now that everyone is leaving the conference and is inspired, i would love to pick your brains on how to deal with a possible conundrum.

I'm currently under contract to buy a buy in Richmond, VA for $85k. Originally my plan was to BRRRR it but after running the numbers on the amount of work that needed to be done, and seeing the selling prices for the houses around it, I have decided to flip it. Fortunately a good friend of mine part-owns a construction company and would like to be part of the deal (as he's never done a flip before) and we have agreed to split the expenses and profit 50/50. Given the I initiated the purchase without him we did not set up an LLC or look into the tax implications. Now that we are playing the waiting to close (on the house) game I started looking into house we are going to recognize the gains, if any, on the property.

The details are:

-I'm financing the entire deal (through a bank)

- We are splitting the rehab  cost 50/50. bids will be placed by the company that he part owns, if his bid wins we use their services, if they are higher we use another. 

- We are splitting the profit 50/50

- I will talking to him about signing a Joint Venture Agreement

- We will be opening a joint bank account where we will deposit money equally as we move through the different phases of the project. 

- I considered opening a Credit Card (with 0% for 12 months) to put other purchases on, and pay off when the house sells. I would be the primary person on the CC and he would be an Authorized user (which i can remove at any time)

I wanted to reach out to everyone on the BP platform since I know that this may take creative thinking. One, I'm I exposing myself too much while he has little to no skin in the game? Two, How do we pay him his profit without being stuck with the entire capital gains liability? Do we pay him like a project manager so that it works agains on basis and we can roll everything over if we decide to 1031?

I would love to get everyones feedback. I know I may be missing some information, but would love to see what people can come up with. 

Carlos Salazar

[Basit Siddiqi]

@Carlos Salazar

I feel like this is making it a little bit too difficult.

Why don't you hire him as a contractor and pay for his services?

You benefit because you have a property that is in better condition and can now be sold for more
He benefits because he is paid for his expertise.

See how this goes and then determine if you want to partner on a deal going forward. A partnership/joint venture is almost like a marriage, you want to make sure before you get into it.