For 15 years, Maria has owned and operated a seaside bakery and caf called The Beachside. Each

For 15 years, Maria has owned and operated a seaside bakery and café called The Beachside. Each morning, customers line up on the boardwalk in front of the building and enjoy fresh coffee and croissants while waiting for a table. "The building is too small," Maria commented to her landlord, Kyle. "Is there any way we can expand?" The Beachside is one of several older buildings on three acres of a ten-acre parcel that Kyle inherited 30 years ago. The remaining seven acres are undeveloped.

Kyle and Maria talked to Josh, a real estate developer, and he proposed an expansion to The Beachside and upgrades to the other buildings. The improvements would preserve the character of the original shopping center, and the remaining acreage would be available for future expansion. Kyle and Maria were impressed with Josh's vision and excited about the plans to upgrade the property and expand Maria's business.

The parties agreed to form a partnership to own and operate The Beachside and to improve and lease the other buildings. Josh summarized the plan as follows: "Kyle and Maria will each contribute one-half of the capital we need. Kyle's real estate is valued at about $2 million. Maria's bakery equipment and the café furnishings are valued at about $500,000. The improvements will cost about $1.5 million, which Maria has agreed to contribute to the partnership."

Josh continued, "You have agreed that I do not need to contribute any capital to the partnership. I will oversee the construction, and when it is complete, I will vest in a 5% interest in the partnership's capital. On an ongoing basis, I will oversee the partnership's operations in exchange for a fixed salary and 20% of the partnership's ongoing profits. The construction is estimated to be completed in June of this year, and my capital interest is estimated to be valued at $200,000 at that time."

What are the tax consequences if the trio forms Beachside Properties as a partnership to own and operate the retail center?

Answer rating: 100% (QA)

When Beachside properties are formed Kyle Maria and Josh must decide first which type of entity to f... View the full answer