Separating Tax Benefits From Cash Flow
I have an investor who wants me to use her cash and excellent credit/income stream to invest in rental units. Her primary interest is in the tax benefits; i.e. MACRS depreciation; and appreciation. My interest is in the cash flow and appreciation.
What I am wondering is if it it posible to structure the partnership so that I can receive the cash flow and she can receive the tax benefits, without me having to pay self employment tax on that income and also when we split the appreciation later.
Any suggestions?
Thanks, Chris
It seems like a lease would work for the cash flow and perhaps an option for your share of appreciation.
If she leased the property to you for the amount of the expenses then you could rent to tenants to get your cash flow.
She gives you an option to purchase that is exercised immediately before the property is to be sold. The difference between the option price and the price the property is sold to a third party is your share of the appreciation. While she is holding title, she gets the depreciation.[ Edited by edmeyer on Date 04/14/2006 ]
No, active income reported on Schedule C and Schedule SE.
Sandwich lease options have been thoroughly discussed in the Lease Options forum. Perhaps you will get a few pointers there.
Can you do a better estimate than that? Do you have any idea of expenses? I would never send a check the way you have specified. You (more than likely) be giving Uncle Sam an interest free loan. Lacking estimates, send a portion of what you have roughly calculated.
I agree: Send less than you think you owe. Maybe 15% or 20% less.
The extension will be granted and your penalty will only be on the shortfall of what you end up owing.
[addsig]
Quote:That is, does rental real estate have amounts for which I am not at risk ? Depends upon your financing. If you have a non-recourse loan, then there are amounts for which you are not personally at risk.
This is more common in commercial loans and with hard money loans. Most institutional residential mortgages for rental real estate will be recourse loans, so all of your investment will be at risk.
By default, a rental property activity is a passive income activity.
If you were holding it for investment use only, then you would not have renters and can not depreciate the property.
If you were holding as your second home, then your deductions are limited to mortgage interest and property taxes on Schedule A. You could have non-reportable rental income from incidential rental use of 14 days or less. While the rental income would be tax free, you can not take a depreciation expense.
Your best use of the property is as an income producing property. I would try to keep the property tenant occupied for up to two more years and report it as a rental on Schedule E.
Because the property was your primary residence for part of 2005, you have a hybrid use property. Part of the year your property was your primary residence and part of the year, your property was a residential rental activity. For the part of the year you used the property as your primary residence, you can take the Schedule A deductions for mortgage interest and property taxes. For the part of the year that your property was a rental, report all your rental income and rental operating expenses on Schedule E and take a partial year depreciation expense.
Beginning with the date you vacated your primary residence in 2005, you have up to three years to sell and still retain eligibility for the capital gains exclusion on the sale of your primary residence. During the three year interim, you are free to use your property as an income producing property and take full advantage of the tax benefits that accrue to rental property owners.
Consult your CPA for specific details.
[ Edited by NewKidInTown3 on Date 04/13/2006 ]