first short sale with a partner and other investor-need help in taxes, LLC

General Real Estate Investing
1

Hello to all,

I am a first time investor and have been working with a partner in locating REOs. We are using my credit and name for the purchases. I am very confused and worried about taxes, capital gains and all other taxes. To keep this short, here is how we have it set to go: We purchase a REO (of course below the asking price) and sell it to another investor, thus the profit margin will be the difference in the two.

So, say the profit margin is 20k, my partner and I will get 10k each, BUT won’t I be taxed for the whole 20k and not just 10k??? I am totally unsure of the best way to handle this situation. I have no problem paying taxes, but i only want to pay for what I get.

does anyone have ANY suggestions as to the best way to handle these deals? I was going to start an LLC with me as the “owner” and purchase the property under that name…???

Also, can I move the profit into the LLC AFTER the purchase?? or do i have to set up the LLC, get checks/credit card etc and purchase the properites under that name?

I appreciate ANY help that seasoned investors can give me. I would like to thank you all in advance.

J.R.

2

on your tax return you show 10k commission expense. send partner a 1099 for his 10k. your profit is now 10k.

note that this is not capital gain property. it is ordinary income, subject to income and self-employment taxes. total tax bite ~ 45%.

LLC by itself will not “solve” your tax issues. A properly structured and operated LLC may lower your total taxes depending on many factors.

3

I know there is a big concern with the IRS on what is an Repair and what is a Improvement. I know others in the same boat as investornewbie7. Partnered, financing in one name, etc… When it comes to tax time, most done on a rehab home are improvements rather than repairs… Ripping out cabinets and replacing is definatly not a repair… New carpet to sell the house faster is an improvement, not a repair… same with painting…

So what advice can i give for this situation where the writeoffs will be improvements and depreciated, rather than subtracted 100% from the profit as an expense? That in my opinion will ‘lop-side’ the 50/50 partnership. Correct?

Thx!

4

there is no depreciation on a rehab. you have nothing to depreciate; you sold it. rehabs are inventory sales.

all repairs/improvements/whatever go in to COGS.

5

Just to clarify, Mark is talking about a rehab-flip.

Normal depreciation rules apply to the rehab that you hold indefinitely for rental use.