Sharing tax benefits with a partner/investor

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Sharing tax benefits with a partner/investor

David Zimmer
Tallahassee, FL · Member since 2017 · 46 posts · 8 votes

A friend and co-investor are currently under contract on a beach home that will be strictly for investment. He is a home builder and his wife is a designer, and I've got experience in managing STRs - so it's a great fit. We plan to do a cost seg and bonus depreciate the house the first year, but we are not planning to start a legal entity like an LLC yet. I'm curious what sort of details we should enter in our operating agreement in terms of how to split the benefits of the bonus depreciation. His income could potentially be much higher than mine, so he may be able to write off more income than I could. Could we simply make a written agreement to split the amount of tax savings once taxes are filed and returns are received? Any recommendations on this?

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John UnderwoodPro Member
Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
1y
Quote from @David Zimmer:

A friend and co-investor are currently under contract on a beach home that will be strictly for investment. He is a home builder and his wife is a designer, and I've got experience in managing STRs - so it's a great fit. We plan to do a cost seg and bonus depreciate the house the first year, but we are not planning to start a legal entity like an LLC yet. I'm curious what sort of details we should enter in our operating agreement in terms of how to split the benefits of the bonus depreciation. His income could potentially be much higher than mine, so he may be able to write off more income than I could. Could we simply make a written agreement to split the amount of tax savings once taxes are filed and returns are received? Any recommendations on this?


 I would definitely talk to a CPA on this. 

You may get some opinions on here that may or may not be the best structure for your unique situation.

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  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    1y
    Quote from @David Zimmer:

    A friend and co-investor are currently under contract on a beach home that will be strictly for investment. He is a home builder and his wife is a designer, and I've got experience in managing STRs - so it's a great fit. We plan to do a cost seg and bonus depreciate the house the first year, but we are not planning to start a legal entity like an LLC yet. I'm curious what sort of details we should enter in our operating agreement in terms of how to split the benefits of the bonus depreciation. His income could potentially be much higher than mine, so he may be able to write off more income than I could. Could we simply make a written agreement to split the amount of tax savings once taxes are filed and returns are received? Any recommendations on this?


     I would definitely talk to a CPA on this. 

    You may get some opinions on here that may or may not be the best structure for your unique situation.

    2Reply
  • Michael BaumPro Member
    Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
    1y

    CPA for sure @David Zimmer. Maybe a tax attorney. You want this setup correctly from the get.

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  • Collin HaysBusiness Member
    Property Manager · Gatlinburg, TN · Member since 2020 · 3k+ posts · 4k+ votes
    1y

    This sounds like a CPA's dream, and probably a lawyer's. They are going to get most of your profit before you even start.

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  • Andrew SteffensBusiness Member
    Tampa, FL · Member since 2022 · 3k+ posts · 3k+ votes
    1y

    There should be an attorney with tax as well as contract/biz law who can properly advise on this.  You could all 3 hire them on a transactional basis or each hire your own counsels.  There are too many variables to get good advice here.  A CPA would be helpful but at the end of the day you are still likely going to want an attorney to draft/review operating agreement anyways.

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    1y

    @David Zimmer Great structure—and it sounds like you’re building a solid partnership. When it comes to sharing tax benefits like bonus depreciation, the key thing to understand is: tax write-offs follow ownership percentages unless otherwise specified in a formal entity and operating agreement.

    Since you're not using an LLC (yet) and likely filing as tenants in common or a general partnership, the IRS will expect all income, expenses, and depreciation to be split based on your actual ownership shares, not a side agreement.

    So, no—you can't simply write a private agreement to “split the tax savings” after filing. That would not be supported in an audit. Instead, you’d need to:

    1. Form an LLC or partnership and file a partnership return (Form 1065).
    2. Draft an operating agreement that allows for special allocations of depreciation (e.g., 70/30 on depreciation, even if ownership is 50/50), which is legal under Section 704(b) rules if done properly.
    3. File using the K-1s reflecting the agreed allocations.

    If you don't go this route, you'll each only be able to claim depreciation based on your ownership % and subject to your individual income limits and material participation status (especially if using the STR loophole).

    If your partner's income is higher and he's more likely to benefit from bonus depreciation, a custom allocation in an LLC is the cleanest way to structure that.

    This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

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    • David Zimmer
      OP
      Tallahassee, FL · Member since 2017 · 46 posts · 8 votes
      1y
      Quote from @Ashish Acharya:

      @David Zimmer Great structure—and it sounds like you’re building a solid partnership. When it comes to sharing tax benefits like bonus depreciation, the key thing to understand is: tax write-offs follow ownership percentages unless otherwise specified in a formal entity and operating agreement.

      Since you're not using an LLC (yet) and likely filing as tenants in common or a general partnership, the IRS will expect all income, expenses, and depreciation to be split based on your actual ownership shares, not a side agreement.

      So, no—you can't simply write a private agreement to “split the tax savings” after filing. That would not be supported in an audit. Instead, you’d need to:

      1. Form an LLC or partnership and file a partnership return (Form 1065).
      2. Draft an operating agreement that allows for special allocations of depreciation (e.g., 70/30 on depreciation, even if ownership is 50/50), which is legal under Section 704(b) rules if done properly.
      3. File using the K-1s reflecting the agreed allocations.

      If you don't go this route, you'll each only be able to claim depreciation based on your ownership % and subject to your individual income limits and material participation status (especially if using the STR loophole).

      If your partner's income is higher and he's more likely to benefit from bonus depreciation, a custom allocation in an LLC is the cleanest way to structure that.

      This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.


      Wow this is SUCH valuable, detailed info. Thank you so much for posting this. I will share this with my partner and make sure we get more input from our CPAs leading up to then. Thanks for taking the time!
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  • Stephen Nelson
    Accountant , CPA, MBA in Finance, MS in Taxation · Redmond, WA · Member since 2025 · 172 posts · 135 votes
    1y

    Two shoot from the hip comments:

    1. I don't know why you wouldn't go to effort and expense of setting up an LLC and writing an LLC operating given your other option is to by default form a general partnership and end up writing a partnership agreement. I can't see how that's less effort.

    2. I think it'll be hard for you to get material participation. Think about some of the issues here. Contractor and designer will combine their hours because they're spouses so they will have more hours than you do thus you'll be looking at the more than 500-hours material participation test. I don't think you'll be able to group this minority interest in a STR with your other STR activities, will you? BTW I'm also not confident even the contractor or designer will be able to get a grouping to work. But they could be incented to make decisions that de-passive-fy the losses but then make them unavailable for you. E.g., if the contractor's business makes him a REP, he'll have an incentive to let the average rental interval rise above 7 days because that'll give him and his wife the ability to use losses.

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  • Josh SedivyBusiness Member
    St. Louis, MO · Member since 2024 · 134 posts · 55 votes
    1y

    Depreciation follows ownership, not an informal agreement. You can't reassign tax benefits after filing. To split depreciation differently, you need a legal partnership with proper allocations and tax filings. Best move is to talk to a CPA and consider forming an LLC or partnership before closing.

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