tax question, can I do exchanges with these? - Posted by cg

Posted by albert on October 20, 2002 at 16:37:09:

yes that is the way to do it.


tax question, can I do exchanges with these? - Posted by cg

Posted by cg on October 16, 2002 at 23:57:47:

I am a liscensed realtor and active investor. A few months ago I structured the purchase of a 9 unit apartment building with 2 other partners. One of the partners did all the work while the other partner put up the cash and also put title to the property into his LLC. I did not recieve a commission in this transaction but instead a third of the equity.
We are now going to sell the property and two of the three of us would like to use the equity and exchange here is my questions

  1. am I able to exchange and use these proceeds to invest into a larger property.
  2. I know we will have to take title to the next property under the LLC what do I need to do so I am not taxed as ordinary income.
  3. My CPA said since I did not take a commision or had no agreement I will be taxed as ordinary income, is this true and how can a avoid that (can I do some kind of option?)
  4. how do we cash out the third partner without claiming the proceeds as boot?(cash out)

Also I have just signed escrow to buy another 4 units for 200k and recieved an offer for 310 on the same property. We accepted that offer and will close out the property and have the buyers close 2 days after we close. The reason behind this is so I take title so I can exchange. Can I do this and exchange since my original intent was to keep it for ever as an investment. Again I have no money into the deal I just structured the transaction and it is also in the name of the LLC.

Hope this all makes sense I want to cross my t’s and dot my i’s because this could cost me alot in taxes if not.



Re: tax question, can I do exchanges with these? - Posted by JHyre in Ohio

Posted by JHyre in Ohio on October 17, 2002 at 09:38:05:

This is a rather detailed question and not one I’m inclined to answer in detail off the clock. Some very valuable pointers:

Your CPA is unfortunately correct - you received a CAPITAL interest in the LLC in exchange for your services, meaning that you owe tax on the equity received at ordinary rates AND are taxable for social security purposes as well…in short, its wages. Sorry. There IS a way around it in the future if you talk to an attorney who understands partnership tax AND knows how to draft a good LLC agreement…that is to receive so-called PROFITS (as opposed to CAPITAL)interests in the LLC. I once used that technique to save a client about $19 million in taxes!

In terms of 1031 with one partner who wants cashed out, there are two basic approaches that come to mind: Either distribute undivided interests in the property and each partner 1031’s or cashes out his respective interest (this is pretty aggressive) or have the LLC make the exchange and refi the new property to cash the other partner out (safer).

John Hyre

What about this. - Posted by cg

Posted by cg on October 17, 2002 at 23:04:13:

What if the partner were to exchange using the current LLC and then at that time could we “draft a good LLC agreement”. I would then not claim any ownership untill we purchased the next property.

How in the future can I avoid this since I try to stay in as many deals as possible but do not put up the actual cash. Do options work? Can my pay be based on specific performanc (i.e. to only be compensated if and only we made a profit)

Also we are currently buying a building using the same LLC as before, And will be closing in 30 days. 7 days following we are scheduled to sell it.

*What should I do now to avoid these issues? Should I take title in half my name or Could I take title in my name only and then exchange with the other property and at that time make a partnership agreement. Would this accomplish the same thing.

This seems to be a double edged sword. I am making more than I ever could have imagined. And am glad that I am making enough where I have to worry about taxes. But it is happening so quickly I am afraid of not planning correctly and paying more than I should. where can I get the best information on tax strategies for Real Estate?


p.s. does anyone know any good attorneys in san diego?