How to legalize a partnership?

[James Wierzba]

Hi,

I have been partners with my brother for the last 5 years on real estate investing. We own 8 units. Our partnership is a little complex:

- We both split the down payments 50/50

- We both own 50% of each property

- I collect and keep all the rent

- I am responsible for paying all expenses, including the mortgage

Since the properties are cash flow positive, I make more money. He is completely passive, hence his lower return. In hindsight the cash flow is not as strong as I projected and the effort is higher than expected and I am considering going off on my own in the future, but this is another topic.

My concern is that I am the owner of all of the properties. And this is basically a hand shake agreement between me and him. We have been ok with that until now, but we are starting to think it might not be the best long term strategy.

Some risks I can think of

- I get sued or divorced or go bankrupt and they can take all of the properties (including his half)

- We have a falling out and I try to take the properties myself

- I would technically be liable for all of the capital gains tax when we sell, even though we should be splitting it.

- If I die, there is no documentation that shows half of the properties are his

The properties are actually all titled under a LLC for which I am the sole proprietor. Originally, I added him as a co-owner of the LLC, but removed him because it added a lot of complexity and a lot of extra fees for tax filing.

My guess is that I will need to set up a real estate trust. Is that the best approach? I have heard that trusts are flexible. Would I be able to codify the rules I listed above in a trust ?

[Ned Carey]

You can do a partnership agreement. A trust agreement or move the properties into an LLC. Any of these and others can be appropriate.

The more important issue is the agreements themselves and what they say. 

You should talk to an attorney to see what is most appropriate for you in your situation. You can get legal self help books from NOLO Press that can help inform you to the issues involved. I don’t recommend doing it yourself but knowing the issues will help you work better with an attorney.