Short Term Capital Gains Questions- Split With Partner?
Here is the situation. What if a property was bought for 60k and then sold in 2 months for 120k?
I understand this falls under short term capital gains, so a 15% tax is charged on the profits correct?
Here is the added element, this deal was brought to my attention by another investor who wants to go 50/50 on this, with me putting up the money, going on title, etc.
How can I structure this so we split the tax results evenly? Basically so we each get taxed 15% for our share of the profits? The way it looks if I left it alone is that I would be taxed for 15% of the 60k profit.
Are there different answers to how I could do this?
Also, I don't have any corporation setup and will not have it ready by the time I purchase. However I could have it done by the time I sell. What advantages would I receive in doing this?
You might want to do a formal corp or partnership. This would allow the profits and tax liability to be split. Otherwise, if everything is under your name, on paper, you'll get the gain but also the tax liability
One other thought, you might want to make sure that everything is on the up and up. what is the reason why the other investor is willing to offer 50% of the profits?
very good question i would like to ad. can you pay him his 30000 profit (50%) and send him a 1099 for his part.
[addsig]
I believe you are wide of the mark on the tax rate for short term capital gains. These gains are taxed at normal marginal income tax rates assuming you own as individuals. The most common form of ownership of property in a partnership of individuals is as tenants in common. This amounts to each party owning half interest in the property where there is no right of survivorship. This means if your partner dies, he can will it to another person. It does not revert to you. You can each be responsible for your own tax gain on half of the profit.
There may be some other complicating tax issues such as self-employment tax. You might look these up or perhaps some other respondents who have expertise in these areas can illuminate further. They may suggest other forms of ownership.
Sorry. I misread the part of you going on title alone. One way that comes to mind that might work is for you to pay partner a "finder's fee" for partner share. This is deductible to you and an income event for your partner.
I'm researching this topic also.
It takes about 30 minutes to set up a corporation. Get your articles of incorporation. Check with the secretary of state for your name approval; call the IRS for a EIN; file your papers at the court house. However, if you form a corporation, the profits are the corporations and you must draw a salary to receive them which is taxed after the profits to the corporation. I'm new to REI, but my accountant says that a corporation is not the best entity for REI. I welcome any other thoughts on that in case he's wrong.
If you buy it as an individual before you form your corporation, you would have to actually "give" or sell it to the corporation and I would think you'd need to know the tax implications, cost/results of this before doing it.
I've been told an LLC allows profits to pass through to each partner and be taxed and gives you a layer of protection. This is what I'm planning on right now, until further research shows me something better. Someone on this board mentioned he forms an LLC for each property.
I've read several topics on this board on land trust which look interesting. From what I can tell they get an EIN. Anybody know how these are taxed?
WheelerDealer, can an individual issue a 1099? Or is this just for a corp.?
Gotta add these questions to my list for my accountant.
Sorry if I've confused you even more
Terry
Another option would be to not take a partner and 1031 the property and pass along the profit to the next deal.
I have to have the partner, he's the one that brings the deal to the table in the first place.
So is passing 30k to him in a 1099 the best option so far? As well as forming an LLC to purchase this property?
Quote:Here is the situation. What if a property was bought for 60k and then sold in 2 months for 120k?
I understand this falls under short term capital gains, so a 15% tax is charged on the profits correct?The short term capital gains tax rate is the same as your marginal tax rate. The profit on this deal will be taxed at the same rate as your ordinary income. Your tax advisor will also have to determine whether self-employment income taxes would also apply (15.3% rate) in addition to the ordinary income taxes.
Your choice of a business entity is probably a question better addressed in the Legal Forum. On the face, it appears that the easiest approach here would be a partnership agreement. Then when the partnership liquidated its assets and distributed each share to the partners, the partners would be taxed only on what was actually received.
Consult an attorney who is versed in LLC and partnership entities for specific details.
Forget LLC for now - just have him sign a joint venture agreement. Setup an LLC when you have more stuff flowing - it costs $500 just to setup LLC in Illinois.