How can I buy out property from partnership? - Posted by Z.

Real Estate Investing
#1

Posted by Z. on July 18, 2007 at 09:38:54:

Thank you for your input.How can you find a positive cash flor property now when prices are so high and there isn’t much available that you could get with a zero down so that your payment stays low enough; right now in Washington state, particularly in Seattle area, market is still strong enough and seller carry backs are just not available as options at all, and foreclosure market is still not high enough n the areas I am interested in…am I missing something? any helpful tips? I would love to get in into no down cash flow properties…Thank you.

Z.

#2

How can I buy out property from partnership? - Posted by Z.

Posted by Z. on July 17, 2007 at 01:46:49:

Hello:

I bought a property with a partner on 50/50 basis, and now would like to keep it as a rental but my partner needs to get his part of investment out - sell. I have done quite a few transactions in the past by myself (Realtor as well) but never with a partner;can anyone recommend the most appropriate way to handle this; the loan is under my partner’s name; we do have official partnership agreement recorded. Put 10% down total between the 2 of us, plus invested around $90K on remodeling that property. I am a bit confused whether I just go ahead and purchase a property on my own name? but then what do I do with the money that I put towards the downpayment and remodeling? deduct it from the purchase price or should we just record a Quit Claim Deed and I then pay the partner off his share? Any experts on this? I would appreciate input. Thank you!

#3

Re: How can I buy out property from partnership? - Posted by Frank Chin

Posted by Frank Chin on July 17, 2007 at 16:17:41:

Z:

Bought a property with a partner in 1984, and bought her 50% out in 1990. The mechanics:

  • Forget about how much was put in, spent on improvements. The issue is how much is 50% worth now worth, today, improved, i.e. FMV. For instance, if the market declined, you surely would not pay dollar for dollar for the improvements. If the market shot up, it’s also not original cost + improvements, but also 50% of FMV.
  • The property goes from A&B to B, and grantor is A&B to grantee B (i.e. you)
  • I bought out my partner, as part of a refi, and the proceeds used to to the buyout. Hopefully, the value has gone up enough for you to do that, without you having to dig out cash.
  • Taxwise, the way my CPA did it. it’s booked as “two properties”, with a different bases, and asset accounts.

– The original half remains the same as before, in service date of 1984, has a basis of 50% the original building, 50% of improvements done, and depreciation that goes with that.

– The “later acquired half”, valued at what I paid for that half in 1990, with in serivce date of 1990, is shown as a separate asset, has it’s own depreciation schedule (numner of years also different as the laws changed), improvements (now 100%) etc. Eventually when I sell, each part would have it’s own “cost basis”.

In short, it’s taxwise, two different properties, bought at wo different points in time, and was not at any time sold.

  • For now, your partner is the one with the tax issue, not you, as he’ll have to report the capital gains on the half he sold, or he can do a 1031 exchange.

IMPORTANT. Make sure you have honest appraisals on record to show it’s an arms length transaction as they are many way this transaction can be done to cheat the taxman.

Frank Chin

#4

Re: How can I buy out property from partnership? - Posted by KN

Posted by KN on July 17, 2007 at 06:25:17:

Truly depends on a number of things. Are you on the deed right now? The easiest thing to do is have your partner quit claim his interest in the property to you and you pay him cash to buy him out. You would of course take the property subject to (existing financing).

If you are on the deed right now and don’t have the cash or his mortgage terms aren’t that great then you could do a refi and pull cash out and buy him out that way.

Now what to do with the money you put towards the downpayment and improvements? Did both of you put the same amount of money into the property? If so then just pay him off 50% of FMV, and I mean TRUE FMV. Not some appraisal that was done 3 months ago. I mean a comparable sale from last week right next door to you. The market has changed drastically and you don’t want to be caught cashing your partner out with YOUR pants down in this market.

If you put in a different amount then figure out the percentage each put in and pay him off accordingly. If you put in $75,000 and he put in $55,000 and the property is worth $400,000 the payout would work

$55,000(buy out)/$75,000 (buyer) * 50%(partnership)* $400,000 (FMV)= $146,667 to buy out.

Then again thatâ??s just how I would do it if I was trying to be fair. you could always try and get a discount after all we are investorsâ?¦â?¦.

#5

Re: How can I buy out property from partnership? - Posted by Z

Posted by Z on July 17, 2007 at 19:40:27:

Hello Frank:

Thank you for your input. If I understood correctly, you refinanced the property and then took a cash out and used it to payoff your partner, right? I assume when you refinanced, you did it under your name only, since you were the one keeping the property? What’s not clear to me is how you came up with a value without calculating the basis and improvements? Sorry…could you please clarify that for me? I have a CPA that does my taxes, hope he knows how to manage this. I am sure he’ll understand what you did as far as putting it as 2 different properties. Thank you so much!

Z.

#6

Re: How can I buy out property from partnership? - Posted by Z

Posted by Z on July 17, 2007 at 08:52:36:

Thank you so mcuh for your reply. Yes, we did invest 50/50 from day 1, and I am not on the deed, althoug recorded a deed of trust later for the half ownership; technically he is the only owner what comes to initial deed. I don’t know if the deed I recorded after the fact for the partnership will allow me to quit claim without paying an excise tax; i am guessing we’ll need to pay that, right? We paid $407K for the property, plus $90K improvements, and another $18K for payments and utilities and we put 10% down. Thank you!

#7

Re: How can I buy out property from partnership? - Posted by Frank Chin

Posted by Frank Chin on July 18, 2007 at 03:56:38:

Z:

When we acquired the place in 1984, we paid 180K, and we spent 25K fixing it. By 1990, it was worth 250K. Her half at FMV would be 125K, regardless of whether we spent 10K on fixup, or 40K on fixup. The needed fixup might have increased the sales price of the property in 1990 by a few thousand. But since it was on things like the roof, furnace etc., it’s stuff that should have been done, and no one would pay 25K extra because it’s got a new furnace. The cost of the fixup would only affect her basis, and thus her capital gains alone. I had yet to have a cpaital gains as I haven’t sold yet.

We had an appraisal done, consulted some RE brokers on how much the place can be sold for, and that was the value arrived at.

Are you saying that the transaction should be based on the purchase price of 180K and 25K for fixup, for only 205K??

No!! Market conditions dictate. I wouldn’t go for a 205K sales price in 1990 myself if my partner offered half of 205K. I rather sell it to a stranger off the street for 250K.

Its quite possible that under other market conditions, say a declining market, that even if we bought it in 1984 for 180K, spent 25k on fixup, and its only worth 195K. Then the sales should be based on 195K, and the partner would then have a capital loss, but that didn’t happen.

The first mortgage was in both our names, and the refi was in my name only.

Frank Chin

#8

Re: How can I buy out property from partnership? - Posted by KN

Posted by KN on July 17, 2007 at 13:28:06:

I’m not a CPA so I can’t advise you on how to work out the tax ramifications. I can tell you what I would do. So far you have $556,000 involved in the property.
$407,000 Purchase price
$90,000 improvements
$41,000 downpayment (you really need to go to Eds seminar no reason for that)
= $538,000 + the $18,000 for payments.= $556,000.

Now this is where it gets tricky are you renting out the property right now? How long have you owned the property? What is the mortgage balance owed? If you give that to me I can give you concrete numbers and show you the math behind the madness. Otherwise this is all I have to go on;
If he sells to you now he is only recording a gain of $9500.00 using $575,000 or $22,000 using $600,000. The only tax implications would be on that $9500 or $22,000 NOT on the balance that youâ??re paying him/her back. So your partner truly does not have to worry about a large sum being owed. You can either hold back $2565 of the $9500 or $5940.00 of the $22,000 (27%)

Assuming the mortgage is for $407,000 this MUST BE DEDUCTED before you divide profits accordingly. So

$575,000 (FMV)
-$407,000(mortgage)

  • $45,000 (your part of the improvements you told me it was split down the middle)
    -$20,500 (your part of the downpayments)
    -$9,000 (your payments towards the mortgage if its being rented then disregard this number)
    = $93,500- $2565.00 for your tax purposes
    =90,935 owed to your partner.

Oh yeah and donâ??t forget to hold 2 cents for my forthcoming bill

#9

Re: How can I buy out property from partnership? - Posted by KN

Posted by KN on July 17, 2007 at 11:55:58:

Why would you have to pay any tax? Youâ??re still involved in the property. However your partner would. How much is the property currently worth?

#10

Re: How can I buy out property from partnership? - Posted by Z

Posted by Z on July 18, 2007 at 09:32:39:

Understood now, thank you. We actually bought the house for $407K put $90K to remodel;we put 10% down; today it’s worth around $600K; 50% off that would be $300K, but we do need to consider the mortgage if I were to pay him off, that’s what threw me off a little, but I suppose we deduct half of the mortgage balance from that balance…Thank you.

Z.

#11

Re: How can I buy out property from partnership? - Posted by Z

Posted by Z on July 17, 2007 at 14:33:10:

Wow, thank you!So, you are still suggesting a Quit Claim strategy, right? Purchase price for the house was $407,000, and mortgage balance right now is $379K because of NEGAM loan, initially loan balance was $366K after putting $40,700 down between the two of us. The rest of the numbers are correct; unfortunately property has not been rented; it’s been under the remodeling stage for a good 10 month,and for 2 month - listed for sale, so we’ve been paying mortgage and are paying it still. The only reason I signed myself up for this one is because of the other partner; he wanted to do this for the first time but was not feeling comfortable to do this on his own.I figured that I make a little bit of money plus listing commission and get my client ready for the next project to do on his own…which he is comfortable to do next time after selling this one:) we’ll see…
I truly do have to send you quite a few cups of coffee (that is if you drink coffee of course), don’t I? :slight_smile: thanks so much! please help with updated numbers if you could, and don’t hesitate to provide your address:) coffee is on me:)

#12

Re: How can I buy out property from partnership? - Posted by Z

Posted by Z on July 17, 2007 at 12:39:13:

sorry, forgot to ask, if I refinance later, do I need him to participate or if property is under my name, he doesn’t have to be involved? I assume escrow company will need to contact the lender for payoff and that would require his participation, right?

#13

Re: How can I buy out property from partnership? - Posted by Z

Posted by Z on July 17, 2007 at 12:35:35:

I emailed you instead of posting here…market value around $600K (from $575 - $600K). If I use a Quit Claim strategy and pay him off, do we need to sign some sort of agreement that he is responsible for his portion of capital gain taxes since there wouldn’t be a sale recorded? So if I do end up selling a property later I would have to pay capital gain taxes on the whole sum; or do I deduct that from his profit in advance? Thank you so much!

#14

Re: How can I buy out property from partnership? - Posted by Frank Chin

Posted by Frank Chin on July 18, 2007 at 14:46:49:

Z:

Your mentioned that there’s a 50/50 partnership, filed, and unless it states otherwise, each partner is:

  • Owns 50% of the propperty
  • Responsible for 50% of debts
  • Made 50% of downpayments, contributions (rehab expsenses)
  • Entitled to 50% of rents
  • Incurs 50% of rental expenses
  • Share 50% of income and losses
  • Share 50% of capital gains or losses
  • Share 50% of depreciation and other writeoffs

Your partnership agreement must spell it out clearly if any percentages are different than the above, and ownership percentages can be written onto the deed.

Without anything said to the contrary, 50/50 means all of the above.

A CLEAN purchase means you take a mortgage into your own name, file the deed in your name, and your partner is paid, and pays his capital gains.

Because it appears the property will not cash flow, and apperciation uncertain in the near term, it’s too risky if not done clean for both you and your partner since:

  • If he is on the mortgage, owns none of it, and he is on the hook, yet excercise no control over the operation of the property. That’s scary.
  • With the property negative cash flowing, when nailed to the wall, you probably have no choice but to walk away, or deed the property back to him. Messy.
  • And if you don’t file deeds as you mentioned elsewhere in the thread, judgments against him can go onto the property, putting you at risk.

Under the circumstances, I wouldn’t proceed unless it’s a clean transaction from the get go.

Frank Chin

#15

Re: How can I buy out property from partnership? - Posted by KN

Posted by KN on July 17, 2007 at 17:47:21:

No he does not have to sign off if you refinance, provided he quit claimed the property to you. On a side note if he does quit claim the property to you make sure the property is clear of an encumbrances besides the mortgage of course).

Also I never coach on a deal thatâ??s done because I hate to make an investor feel bad about a situation but I must adviseâ?¦. Why would you want to take full responsibility for this property thatâ??s not brining in any income?

Your negative amortization is costing you $1083.00 a month. Your mortgage is costing you $1500 a month ($18000/12). So youâ??re basically losing $2583.00 a month. And Iâ??m not sure what market youâ??re in but here in Florida the market has been declining. So what your property was worth 3 months ago may not be what itâ??s worth nowâ?¦…And you want the privilege of paying $90,935 for the possibility of clearing $22,000 max (using $600,000 as the FMV). P.S. If it hasnâ??t sold in 2 months then $600,000 is not FMV or itâ??s poor marketing.

In essence Iâ??m asking, what is your exit strategy? I donâ??t want you to do all of the things I recommended and end up with a dog. Iâ??d like you to have some money left over to pay for my double mocha cappa latte skim ½ and ½ + foam no sugar, add splenda how can this still be called â??coffeeâ??.

#16

Re: How can I buy out property from partnership? - Posted by z

Posted by z on July 18, 2007 at 15:17:19:

Frank:

Yes, it is all clean, and even though I am not on the title nor on the loan, there is a partnership (deed) recorded, so it shows that I am entitled to a 50% of all the proceeds as well as responsible for 50% of all the expenses on the house. Thank you.

Z.

#17

Re: How can I buy out property from partnership? - Posted by Z

Posted by Z on July 17, 2007 at 19:52:37:

:slight_smile: always helps to have a good sense of humor:)
I totally understand what you mean…I am in Washington state, and luckily we are still OK market wise, although you are right, I am not making any money by paying mortgage and utilities every month and renting it out. If i keep the house, I would need to probably refinance so that I am not stuck with a negative amortization loan. I could rent it out for about $2,000 a month; even then there wouldn’t be a cash flow (I’ll save for your double mocha though:), still better than keeping a NEGAM loan:)); so far market here is still expected to continue upward in the next couple of years (although slower now than a couple of months ago), so hoping to keep this rental long term due to its location. What would you do if you were in my shoes?

Z.

#18

Re: How can I buy out property from partnership? - Posted by Gene

Posted by Gene on July 18, 2007 at 07:44:26:

Sound like an expensive way to speculate.

Right now I am wouldn’t hold a negative cash flow property for hopes of appreciation.

Why will properties values continue up? I have read that much of Washington state has had a ton of new building. Sales are down, inventory is up. IMO its just a matter of time until prices drop.

Don’t buy into the realtor association BS. Do some homework.

Appreciation is not in the bag. There is risk right now.