Is This Allowed?
Hello, All
I believe this question needs to be addressed from both an accounting and legal standpoint.
The other day I read, I think in one of Cook's books, that one method that can be used for, "no money down investing", is to find a partner and present them with this offer ... If they'll partner with you, put forth the cash/credit necessary for the acquisition of a property, allow you to keep the monthly cash flow from said property, and split the sale proceeds 50/50, You will manage all aspects of the property and give them the full depreciation write-off.
When I mentioned this method to an accountant, they laughed and said, "It sounds to me like you're selling tax write-offs. I doubt that this method is permissable by the IRS or legal for that matter. If you're a 50/50 partner with regards to the purchase *and* sale of the property, I should think you'd have to be a 50/50 partner in it's depreciation."
Obviously, my first question, is the accountant right or wrong? My second question, if Cook's method is allowable, could I, as a further enticement to the would-be money partner, offer to pay a portion of or even the entire amount of their Cap. Gains tax?
Thank you in advance for any and all assistance.
RJ
When was this book written. Many tax loopholes that were available to investors in the 80s have been closed for some time now.
You can always get another opinion from another accountant, and another from an attorney experienced in partnerships.[ Edited by DaveT on Date 02/04/2004 ]
Dave,
Thank you for your reply. I think the copyright on the book was '98, but I have no idea when that particular method was dreamed up. Naturally, I'll be contacting other accountants and lawyers. Thought I'd try the group first, I figured if anyone would have firsthand knowledge of the method or it's practical application, it would be a member of this site. <g> I'm surprised I've only received one response. I think I'll post it in the general section and see if anyone has actually tried or used the method successfully. Thanks again for your response.
RJ
Please let us know what you find out, I would be interested in doing some of the same deals in the future and have thought about structuring them simlilarly
It CAN be done but there's a price. You can allocate deductions disproportionately in an LLC (e.g. - all depreciation to the money guy) BUT the allocations have to have a business purpose independent of taxes AND you have to follow special IRS accounting rules for capital accounts (Section 704(b) of the Internal Revenue Code).
John Hyre, Tax Attorney, Accountant, Investor
I wonder if you can accomplish this using an option. You put your elephant on title and he/she grants you an option to purchase 50% at some future date (when the property is to be sold). As option consideration you pay taxes. You agree to manage the property for a fee (the cash flow) and investor (elephant) takes the depreciation since he/she owns property.
Now Dave T and John Hyre can shoot the fire arrows!
Ed,
That's actually not a bad idea as long as you can come up with a non-tax business purpose for the structure. It's likely to get you to the same spot with a bit less hassle. Just make sure that option is enforcible! Also, you may run into state licencing issues when managing a property for others....RE Agents always want their cut and then some!
John Hyre, Attorney, Accountant, Investor
Thank you John and Ed for your replies and suggestions. All I have to do now is find someone here (Chicagoland) that can help me iron out the kinks. <g> Thanks again!
RJ