Untraditional "flip" - how to handle tax liability?

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Submitted by FeistyNumerate on December 11, 2018 - 5:44pm

This past year I helped a friend get out from under a house that was falling apart around them.

In doing so we entered an agreement in which we established a purchase price for the home but in which they continued to carry the note. In exchange I covered the carrying costs of the house and fronted/loaned them the money to move out and secure a lease. In addition I covered the repairs and remodel of the house in order for it to hit the market with better results than what could have been expected from a cash buyer. The house would not have been approved for traditional lending in the state it was.

The house sold and I was paid out from escrow the difference from our purchase price and the price the house sold for.

I did charge interest for the loan amount. Where I am stumped is how to do I classify the amount that exceeded loan/interest??

I am not attempting to welch on any tax liability, and I'm anticipating this amount will be taxed at my income tax rate.

Thank you in advance! I'm also interested in any accountant referrals for someone with RE experience.

Submitted by gzz on December 13, 2018 - 3:07pm.

Take the amount you put into the transaction, then the amount you got out of it. The difference is taxable income. Doesn't seem too hard if it was all in the same calendar year.

Submitted by Myriad on December 17, 2018 - 1:43pm.

Technically it doesn't sound like a loan. What you did was you essentially created an equity investment with a preferred return from operating cash flow (monthly/quarterly depending on the duration), and distribution on a capital event.
This structure is pretty typical for a multi-investor structure where a LLC is formed and a K-1 is issues each year.
Could you claim capital gains on the portion above the loan interest? That would depend on how you structured the initial investment and how that is viewed by the IRS.
Though I doubt you could run into a problem by paying the income tax rate. You could construe it as a deferred interest payable at the capital event.

Submitted by FeistyNumerate on January 11, 2019 - 11:28am.

Thank you both!

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