I just saw the 50/50 provision, sorry. You need more information.
9. If you have title to the property, you owe tax on all the capital gains. If you pay your friend some of the proceeds, that is a tax-free gift and does not change the amount of tax you owe.
10. I can think of three ways to pay your friend, an easy way, a middle way, and a hard way.
- The easy way is, you own the property exclusively, you sell it and pay all the tax on your personal tax return, and then you gift him 50% of the proceeds after tax.
- The middle way is you buy the equipment from him up front for half its fair market value (or some other agreed upon price). He pays income tax on his capital gains (difference between the selling price and his cost basis, which is zero.) When you sell the property, your capital gain is the difference between the selling price you received and the price you paid to your friend. However, your holding period will reset if you do this and if you hold the property less than one year, your gain will be taxed at a higher rate. You also might not be able to sell the property for what you think and end up short.
- The hard way is, you form a partnership where the partnership owns the property. The property is sold in the name of the partnership, and the partnership splits the proceeds among the partners. The partnership does not have to be incorporated (such as an LLC) but it does need to file a separate partnership tax return. This is a form 1065, and it is due March 15 of each year, 1 month before the regular April 15 tax deadline. The partnership tax return will list the income and expenses of the partnership and generate a K-1 statement for each partner, that goes on the partners' personal tax returns where they will pay their share of the partnership's income taxes. If you do this, you may want to pay to see an accountant ahead of time so you don't get into trouble accidentally.
11. The worst way to handle this, in my opinion, will be to treat it as a consignment business. If you do that, you will pay ordinary income tax on the difference between the selling price and what you pay to your friend. Your ordinary income tax rate could be 22% or higher while the capital gains rate is 15% for most people. On top of that, you will pay 15% self employment tax. And on top of that, you would be required to issue a 1099-MISC to your friend if you paid him more than $600, and he would have to pay regular income tax, instead of capital gains tax or no tax as in the other methods.
