All Forum Posts by: Michael Plaks

You do not need to formally partner with him. In fact, I would recommend that you do not make him (or anyone else) an equity partner unless you must. Too many reasons, and his IRS problems just add another reason to avoid it.

Instead, just have an agreement on his compensation once the deal is sold. Assuming he will not demand an equity stake.

Clarification: being audited is not a problem on its own - for you or for the lenders. However, if he loses the audit and is unable (or unwilling) to pay the IRS - then it can become a problem.

@Linda Weygant

I'm sorry if my posts appeared aggressive to you. I see nothing aggressive or disrespectful in a simple statement that you were mistaken. Unlike you, I did not get personal, until now. My goal is to ensure that people get correct answers. Isn't yours the same?

@Linda Hastings  @John Newsom

My colleague is incorrect. I responded to her in the other thread.

@Linda Weygant is mistaken. Treatment of discounted notes is very different from installment sale - which is what Linda described. 

For performing notes purchased at discount, the "market discount" treatment applies - see Sec. 1276/1278. The entire principal portion is recognized as interest income until the note discount is exhausted. Only then it starts going towards principal. 

And since Linda is likely to disagree - here is a highly technical article on this issue.

@Lauren Gilliard

With or without LLCs, 50/50 partnership is the worst option to do a deal together. Yes, it is the simplest to propose, but the worst in terms of potential problems. (Think marriage.) If at all possible - make one of you run the deal 100% thru your respective business, with the other partner being either a lender or a contractor. Neither prevents you from splitting profits 50/50, but it prevents dozens of other problems.

If this is impossible due to egos, trust and whatnot - then try 60/40 or 51/49 partnership. Only if it is absolutely unavoidable to go 50/50 - then you might have to accept it. If both of you have ownership interest, then you need to form a separate LLC. I suggest your respective LLCs be the members of the JV LLC, but check with a lawyer - maybe there're legal reasons to own the new LLC under your personal names rather than under your LLCs.

Transparency is easy with a joint bank account. Btw, if there're any concerns about transparency and trust - it's best to not do business together.

@Thea Linkfield

I think there's still some confusion left as to the partners' expenses, either S-corp or partnership. Reimbursing expenses incurred by the partners are not distributions in the sense of the S-corp equal distribution rule. Example: you bought $200 of paint on your personal credit card, and the LLC pays you $200 back. This does not break any rules.

However, if you had no initial capital in the LCC and you paid $50k of expenses, one of your partners paid $100k, and the other paid $150k - you do not have equal 1/3 ownership of the LLC any longer. You have 1/6, 1/3 and 1/2 ownership stakes, respectively. Such fluid change of ownership can create all kinds of issues and is not recommended.

I recommend you do NOT structure this "working with 2 other people" as a joint venture at all, if possible. Keep the LLC as your exclusive business and document your partners as either lenders to the LLC (if they provide money) or contractors of the LLC (if they provide labor or services.) Too many reasons for this.

If you're unable to agree to this, and your partners demand ownership stake, then you all really need to contribute lump-sum capital into the LLC, instead of buying things for the LLC at random. The latter is a time bomb, and not just for taxes, but more importantly for the general health of your partnership.

Finally, no rush to elect S-corp until your business shows substantial profit - which is not guaranteed in your first year of operation. Besides, S-corp does not necessarily reduce SE tax for you, it depends on your financial situation. When/if you do elect S-corp status - you will only need to pay reasonable salary to those partners who provide services/labor.

@David Ptak

I also agree with @Tom Gimer. "Everything you read" refers to the properties you legally own. You do not own this one, not yet - as far as I understand land contracts.

You may want to double-check with an attorney, and I'm not one.

@John Newsom

Welcome to note investing and to BP.

Since you mention that a principal payment was made, I presume we're talking about a performing note. The principal payment will be neither principal repayment nor capital gain. It will be taxed as interest.

Only after you claimed the entire 50% discount as interest, the remaining principal payments will be treated as return of principal. I know this may sound strange, but it is how it works.

If this is a non-performing note, then my answer would be different.

@Jack B.

First, @Account Closed.

@Nik Divakaruni

I hope @Brian Schmelzlen does not mind me jumping in. Your interest income is taxable in full, always. Your interest expense is deductible as investment interest on Schedule A (itemized deductions), as long as it is not higher than the interest you're making.

If you're not itemizing - the likelihood of which is much higher if the tax reform passes - then you're not getting the benefit of the interest you're paying. Taxed on one and cannot deduct the other. Not fair, I know.

This can be prevented if the owner financing is done inside a business entity.

Also, your calculation of the capital loss produces the correct answer, but it is based on the wrong calculation. You do not add depreciation recapture to the purchase price. You subtract depreciation from the tax basis. Same result, but different numbers.