How To Break Up Profits The Right Way On A Flip?
I am going to be in the mix of my first rehab/flip pretty soon and I am wondering how to structure the profit/expenses for tax purposes.
I have it set up so I am the investor and two gentlemen will do the work and we will spilt the profits 50/50 (50 for me and 25 for each of them)
For tax purposes one of the guys who is doing the work said the most fair set up would be to make a “joint partnership” (apparently a one time thing) where we when we split the profits we also split the expenses.
For example: I would have 50% of the profits to deduct from my profits while each of them would have 25%. That is also the percentages we split the profit.
House 100k
Expenses 20k
Sale price 150k
Profit 30k
Me 15,000 Partner1 7,500k Partner2 7,500k
Exp. 10k (50%) 5k (25%) 5k (25%)
He claims this would defer him from having to get taxed twice on the money. Once from my capital gains, and then secondly from his income tax. Lastly, he said the capital gains tax would just be the current rate our income is now being taxed. (abut 25%)
Does this make sense and is this a smart move for me as the person putting up all the money?
Thanks in advance!
Thank you for the reply.
I will be the money man in this deal. From down payment, carrying costs, everything... they are doing all the work.
I still am very confused on the what I will be taxed. My income is 80k, does this effect the capital gains rate? Or is this rate a flat fee. I understand LT capital gains at 15% but what will my profit be taxed on the short term and will it be taxed twice?
My workers claim that their profit (if I just claim all the profit than pay them) will be taxed once (my capital gains) than taxed again when they claim it on there tax returns.
Apparently, creating a joint partnership and dividing the expenses as a % of profit is better (see previous post for more detail).
However, would this be far to you if you were in my place. I am the the one putting down ALL the money?
You are right, Chris. Thanks for the clarification.
[addsig]
Thanks for all the clarification guys!
A couple last questions.
Does the dividing of expenses still make sense? (as a % of profit, see original post)
Lastly, I always assumed capital gains for short term profit is a third. If I am going to be taxed on this as ordinary income, I believe it would be around 28%. Am I on the right page here and if so, are these capital gains taxed just once? I am currently employed by a company and not self-employed.
?
Thanks in advance.