Partnering on a flip

[Hyung Lee]

Hello,

New to the group but learning a ton and interested in feedback from others especially tax professionals. I'm considering partnering on a flip in Southern California. I have a regular 9 to 5 but know someone in real estate who I'm probably going to partner with. We will both make a relatively equal cash investment and split the profits equally. I will be taking on the loan in my name and they will be owning the rehab portion of the project.

My question is, what is the best way to structure this? Should we form a Limited Partnership, doing a land trust into the LP and issue K1's at the time of sale? My understanding is that is the best way then we only pay the capital gains tax. I have gotten some odd advice on setting up this structure up so was hoping to hear what others have experienced. Thanks in advance!

[Michael Plaks]

@Hyung Lee

There was some real good input from @Ned Carey, @Eamonn McElroy and @Katie L.. The reason why all of that may sound overwhelming and confusing to you is because these people spent many years learning this business and became experts. You hope for a shortcut and some simple answer to a potentially very complex situation - and it's not realistic.

The only (relatively) simple setup is if you own the entire deal under your name, and your buddy is your private lender. But once you start talking about splitting the costs and the profits - you enter major complexity. You are only thinking about taxes, but taxes are the least important of the 3 areas that you need to consider:

1. Dividing responsibilities, costs and benefits under numerous possible what-if scenarios. You're already mentally dividing your future profits, but what if I told you that 95% of first-time flippers lose money on their first deal?
2. Legal protection from third parties and from each other
3. Taxes

All three need to be thoroughly considered before giving you a responsible recommendation. And such planning is an art, not a science. My eventual recommendations will almost certainly differ from those of Eamonn, and both of ours are likely to be different from Katie's. Not to mention - from that company that you already engaged.

So either a) follow the KISS principle b) accept the complexity and the need for one-on-one quality help or c) play the Russian roulette and take your chances that things will work out fine on their own