I have entered into the following partnership deal to acquire a real estate condo with a partner:
I found a nice deal
My partner is purchasing the real estate under his name, i.e. putting the down payment and obtain a mortgage under his name (using his credit etc.)
Me and my partner enter into a partnership agreement whereas I’m responsible for some portion of his mortgage, making back to back payments directly to him. I also provide property management services.
Partnership agreement states that we share 50:50 in this real estate (ownership, profit, losses and any gains etc.)
My questions are:
Is everything here legal?
Since i’m not on title, is a partnership agreement stating the relationship as describe above protects my ownership right and holds in court?
For tax purposes, based on our partnership agreement only (since i’m not on title and not on mortgage), am I considered owner of a real estate and can utilize all tax benefits as usual, if I were on title and mortgage docs ?
To secure my right to the title, i’m putting a clause in the partnership agreement which allows me to record a lien on the property. Also, there is a clause stating that at any time, after considering legal and tax advise, I can force the other partner to transfer over title to the partnership.
Would this be ok to protect my rights?
Also, as far as tax deductions, my only concern is what are the tax implications, if any, for securing my rights to title and my right to deduct mortgage and other related expenses through a partnership agreement like this as opposed to having my name on the actual title and the actual mortgage documents.
If the partnership owns the property, then the partnership will pay all expenses of ownership from partnership revenues – the loan payment, property taxes, repair costs, legal fees, advertiseing, utilities if not paid by the tenant, etc. Should there not be enough income to cover all the bills, I suspect you and your partner will each have to contribute cash out of pocket to the partnership
What ever is left over after all expenses have been paid, is NET income and becomes taxable to you and your partner. The partnership will file a tax return telling the IRS how the net income is distributed to the partners. The partnership should also give each partner a Schedule K-1 which tells each partner how much of the partnership’s income or loss is to be reported on each partner’s personal tax return.
Your question really involves a lot more details that are better addressed by your attorney and your CPA. Make sure you address whether your managment role makes you responsible for preparing the partnership tax return and Schedule K-1s
thank you but let me try and clarify what i’m trying to understand here. I’m both CPA as well as having legal background.
Will stating my rights in the property in an agreement between us while leaving my partner solely on title at the beginning be sufficient to secure my right in the property for tax and legal purposes?
We will not even register/establish an official partnership but only sign a partners agreement between us. I believe that for tax purposes you don’t really need to officially register the partnership for it to be considered a partnership therefore there will be no K-1 or 1065 but only each partner will report his share in this business on his 1040.
I am not an attorney, just giving you my opinioni for educational purposes.
If you are planning to form a partnership under the conditions you outlined, I believe your partnership may be treated as a general partnership wherein each partner is personally liable for the actions of the other even if those actions were unrelated to the business of the partnership.
It is true that the IRS does not require a formal partnership entity for two co-investors to be treated as a partnership for tax purposes.
Definitely get legal advice here. I am thinking that what you really want is a joint venture agreement. Consult your attorney for specific details that apply in your circumstances. Put everything in writing so there is no opportunity for ‘selective’ recall later if things go sour.
You are correct, Dave. Any partnership liability is a personal debt of the general partners. That’s why I like LLCs in these situations. Members are not personally responsible for the actions of other members.