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

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 As such, any monetary capital contribution is not taxable when contributed nor when withdrawn; only the income (interest, if any, rental, capital gains, etc.)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.

The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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