What is the most tax-efficient option for co-investing with a cash bonus from a commercial real estate development company?

by Dafna Meltzer, CPA | May 18, 2018
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I currently work for a commercial real estate development company, and I am paid a cash bonus for each deal that I find. I am also allowed to co-invest in all our deals, which I plan to do for each deal that I find. I want to negotiate an arrangement with my employer, but I am unsure of the most tax-efficient option. Right now, I would get my cash bonus taxed as ordinary income, and then invest that money after taxes in my deals, which then are subject to capital gains tax. Is there a way to be compensated that would allow me to bypass that ordinary income tax and just pay the capital gain when the investment is sold?

The short answer is no.

I assume from the narrative that each deal is set up as a co-ownership, partnership, or LLC. As such, any monetary capital contribution is not taxable when contributed nor when withdrawn; only the income (interest, if any, rental, capital gains, etc.) is taxable. However, when an individual receives a percentage in exchange for services (in this case, "finding the deal") then the value of that percentage becomes compensation. The timing of the taxability of that compensation is subject to a number of factors not relevant here.

Due to the complexity of the issue, I suggest you sit down with a CPA to explore the tax implications in detail for your specific situation.

For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: Dafna Meltzer, CPA, is with Meltzer & Meltzer CPAs in Elkins Park, Pa.

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