Hi, it's me again! :-) I'm the guy with the idea of creating a partnership with my parents to buy a duplex in an expensive part of town. http://boards.fool.com/Message.asp?mid=18167875 I checked out NOLO's LLC book and their Partnership book and have come down to two key issues I need to work out:

1. % ownership
2. unequally allocating paper losses to partners

1. % ownership

According to NOLO, % ownership interest, "capital interest," is created via contributions of

*cash
*property
*services, or
*a promise to contribute cash, property or services in the future

My parents will be contributing more cash than I, but I will be handling things like working w/ the seller, legal, accountants and the lender. My parents and I feel it is fair for me to claim a greater percentage of the starting equity because of my extra involvement.

However, NOLO says, "...whenever LLC members sign an operating agreement that issues a capital interest to a member in exchange for services, that member obligates herself to pay income tax for the value of those services as recorded on the LLC's books."

Is there any way around this? Everytime I talk to people knowledgeable about this issue (lawyers) they say something like, "yeah yeah, that's no problem, don't worry about it" However, I can't get a straight answer from them and that leads me to believe they don't know what the heck they're talking about - either to support their argument or to deny it. Any experiences here? Thoughts, suggestions?

2. Unequal Distribution of Profit/Loss

A quick reminder - we want to divert paper losses to my parents who have a lower income and will be able to claim the $25k losses, whereas I am over the income limit.

The main theme here is that we will be unequally dividing our "Profit and Loss Interests" (as opposed to "capital interests") and in order to do so, we will need to comply with "Safe Harbor Rules for Special Allocations." NOLO says, "...the IRS regulations covering special allocations go on for pages(sec 1.704.1 to 1.704.3)" Essentially, they say you have to keep up separate capital accounts to know which partners take out the greater profits, etc. So, if a partner takes out extra profit early, their capital accounts would be lowered, so as to keep it fair between the partner who reinvested some of his/her profits instead of taking it out.

I'm familiar w/ bookkeeping, so keeping track doesn't bother me. What I want to nail down, though, is that if we assign a paper loss to one partner (my parents) that is really like assigning a tangible benefit to them, and it should decrease their capital account based on the tax benefit received (paper loss times tax rate).

So, I would want to deal with this two ways:

1. (preferred) My parents would take their tax benefit from the paper loss and put it back into the partnership to be held as equity, reserves, pay down debt, etc. Doing this keeps the capital balances equal. or

2. My parents simply take the tax benefit/rebate and we decrease their capital account by the amount of the rebate.

Is my logic correct in 1 and 2? Do you think it will pass muster?


I have one last question now that I think about it. What I am really dealing with is distributing the depreciation tax advantage each year. I am just curious - how will we be taxed on the gain that comes from lowering the basis by depreciation each year? I think the term is "recaptured depreciation?" At what rate is that taxed?

Thanks!!!