A father and son are planning to buy a "fixer upper" home which they're going to rehab and sell (flip) at a higher price, and split the profits. The son is in a high tax bracket and the father is unemployed (0% bracket). The son is going to provide all the financing and pay for the father's living expenses during the project. What is the best way to structure the deal to minimize taxes?
Some options we've been considering:
-1- Sole Proprietorship owned by the son. SP pays salary to father for living expenses. Profits would flow through as capital gains to the son. Father's share of profit would be paid by SP as a salary bonus (deductible in the son's return).
-2- Sole Proprietorship owned by the father and funded by a loan from the son. Father lives off loan during project. Profits show up as capital gains on the father's return. Son's share of profits would be paid partially by the father's SP as interest on the loan, and the remaining as a non-taxable gift from the father. Son's return never sees the Capital Gains.
-3- Partnership, LLC, or S Corp owned 50/50 by the son & father, funded either by a loan or capital contribution from the son. Entity would pay salary to father for living expenses. Profits show up as capital gains on both returns.
Is there anything we're missing here or any special IRS rules which could make one of these options a Bad Idea? Thanks.