BeachFleischman’s partnership, operating and management agreement reviews help real estate investors identify and avoid the pitfalls that can trip up the unwary. When it comes to how to structure a real estate entity, tax benefits and consequences are among the most important yet commonly overlooked factors. That is why review of any entity agreement by a knowledgeable tax advisor is a crucial first step.
What Is The Purpose of Your Real Estate Entity?
Does your operating agreement accurately describe the purpose of your real estate partnership? Depending on the purpose stated in that agreement—investment, development or rental—you could be facing 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 actually being held for investment, your hands may be tied when it comes to treating that income at the lower capital gains rates.
Have You Left Anything Out?
The partnership agreement is the road map that will guide the partners and investors through the most 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 need to know when and how much additional capital they will be expected to inject into the partnership—and the consequences of not doing so (i.e., dilution of profit and loss percentages).
Some of the crucial items that should be addressed in a partnership, management or operating 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
How the Right Accounting Firm Can Help
Leaving out important elements of an agreement—or worse, not having an agreement at all—is a sure way to court trouble in the form of disagreements between partners, unwelcome tax liability and even exposure to liability.
Because every agreement is unique, savvy real estate investors seek insight from tax advisors who have seen hundreds or thousands of agreements before—and who know the potential tax implications of each type of agreement
BeachFleischman CPAs are knowledgeable real estate tax advisors. For more than 15 years, we have been advising clients on every type of real estate entity, including:
- Rental real estate
- Real estate development
- Investment partnerships
- General purpose partnerships
Because of this depth of experience, we know the risks and pitfalls and can help you avoid those future problems.
If you are considering investing or participating in a real estate entity—whether in Phoenix or Tucson, Arizona (AZ) or anywhere else in the U.S.—BeachFleischman PC can help you evaluate the tax consequences of that investment and structure the agreement so that it meets your goals. Contact us via the submission form below to get started.