Contracting Partner Paid After A Flip
Hello all,
I am new to the forum and the industry. I am based in Detroit and I am working to purchase, rehab, and flip foreclosure properties in the metro area. In order to minimize my initial capitol outlay, I put together a business plan whereby I am partnering with a contractor that is willing to engage in profit sharing after the sale of the property. Essentially, I am obtaining the mortgage, paying for the materials, and any subsequent mortgage payments - the contractor will be solely responsible for the rehab. After the house sells, we are splitting a percentage of the net profit.
My question is with respect to the taxation of the profit. If the net income from the flip is 20k, and we split the profit 50/50, will I be taxed only on the 10k, or will it be on the 20k? Is there any documentation I need to obtain to ensure I will be taxed for the lesser amount?
Any advice or feedback would be greatly appreciated.
You get the $20K net profit. You give $10K to your contractor for his share of the profit along with a 1099 for $10K.
Your net taxable profit is only $10K.
Your CPA will be able to give you specific details.
Make sure to get your contractors social security number BEFORE you start this so that you can properly report the payment on IRS Form 1099 and any applicable state forms. A signed written agreement between the two of you explaining the details would also be a good idea to avoid problems later.