BeachFleischman’s operating, partnership, and management agreement reviews help real estate investors identify and avoid the pitfalls that can trip up the unwary. Tax benefits and consequences are among the most important and commonly overlooked factors when it comes to structuring a real estate entity. Engaging a knowledgeable tax advisor to review an entity agreement is an important first step.
Purpose of entity
Does your operating agreement accurately describe the purpose of your real estate partnership? Depending on the purpose stated in the agreement – investment, development, or rental – you could face drastically different tax implications.
For example, investment income is taxed at capital gains rates, but development property is taxed at ordinary income tax rates. If your agreement states that development is a part of the partnership’s purpose, but the real estate is being held for investment, your hands may be tied when it comes to treating that income at the lower capital gains rates.
Has anything been overlooked?
A partnership agreement is the road map that guides partners and investors through important decisions about how they operate the partnership. It also tells each partner what to expect in terms of his or her obligations under the agreement.
For example, capital calls are common in development partnerships. Real estate partners must be well-informed about the timing and extent of additional capital they are expected to inject into the partnership. Failure to comply could result in consequences such as the dilution of profit and loss percentages.
Some of the key items that should be addressed in an operating, management, or partnership agreement include:
- How income will be allocated
- When capital contributions are expected
- When and how partners can sell their interests
- At what prices partners can sell their interests
- To whom partners can sell their interests
Work with an experienced accounting firm
Leaving out critical elements of an agreement or proceeding without one can increase the risk of disputes between partners, unwelcome tax consequences, and liability exposure. Because every agreement is unique, savvy real estate investors seek insight from experienced tax advisors who have reviewed many practice agreements and understand the potential tax implications of each.
BeachFleischman advises clients on many types of real estate entities, including:
- Rental real estate
- Real estate development
- Investment partnerships
- General purpose partnerships
Our knowledgeable professionals understand the risks and pitfalls to help you avoid future issues.