What is Taxed Higher?

Question

Hello Everyone

I am trying to figure out what is taxed higher interest from a note you hold or cash flow from a property you own?

Lets say the interest and the cash flow are $4500.00. After deductions each year you claim $120,000.00 / year as income.

Are these two forms of income taxed differently?

Pat L. · Answer

Then again how much of the $4,500 you assume he makes does he actually claim as taxable.

I did the same in my youth with an old investor neighbor who laughed at my offer. After reflecting on my naiveté I approached him for advice & he became a great mentor, a little shady but very knowledgable. I never could afford to buy any of his multi's but he did refer me to several deals that had not reached the market & he knew what they were actually making & what they would take. Over the years I shoveled the snow from his driveway & walkways & became one of the very few who had a key to his backyard & well stocked pool-side bar. He & his wonderful wife were gracious enough to hard money several of my early investments that subsequently paid huge dividends. One of which I still own & has returned me $480,000 free & clear. We were close friends until they both passed in 2008.

So I would offer to buy lunch for your guy & review your plans/intentions with him & see what he counter-offers. Ya never know!!!

Rich Hupper · Answer

@Charlie

Thank you for your reply. The reason i ask this is because i am going to approach a guy who has owned a 3 unit building for over 30 years and does not have a mortgage. All the units are rented and after hypothesising his expenses i find his monthly cashflow is roughly 4500/m.

I want to buy the house and have him owner finance me. I need to find an interest rate, purchase price, and term that will get him 4500 a month as interest on a loan.

I also need to show him that this would benefit him as he will no longer have to be a landlord and still have his money working for him.

Charlie Fitzgerald · Answer

I am not a CPA...I do believe that both of those incomes would be considered passive investment income and your tax treatment would be identical.  There are of course other benefits to a physical asset investment that does not come along with a note investment and there are also expenses that do not come along with a note investment that are realized in a physical asset investment.  So you need to consider that aspect as well.  As far as the taxation on net income from either form of passive income, it would be the same on my opinion.