Is there a way to give a private money lender or capital investor tax deductions?

Question

Hello all, we have many high net worth individuals that around the same time every year (November-December), are looking to inject a bunch of capital into investments for tax deductions for the fiscal year so they don't end up paying a buttload in taxes. Is there a method for us to utilize this capital as high-end flippers/developers while allowing the investors to get some sort of tax deduction for their invested capital? Any ideas would help. Thank you.

Andrew Postell · Answer

@David Fan I mean, kind of. So, if you purchase a property to flip and dump a bunch of money in it at the end of the year...all of those things are tax deductions...but then you'll have to sell the property the next year. And that's when you would pay the taxes in the next year. If you flip for profit...and you had better be doing that...you'll have to pay taxes on those profits. For us "buy-and-hold" investors we get the added deduction of "depreciation"...but people are sometimes caught off guard with how these deductions work. Most of the time you get a deduction because you paid money to get it. Meaning, if I replace the flooring at a cost of $20,000...that $20,000 is tax deductible...but I had to pay $20,000 for it.

Hope this makes sense how I am describing it.

Hope this makes sense how I am describing it.

David Fan · Answer

Thanks for your response! I appreciate it. What I'm referring to is if people are putting money with us for the fix and flips, if there's a way for them to deduct their taxes as private/capital investors.

Michael H. · Answer

There is a lot of misleading information in this thread. Message me if you’d like to discuss. Im in Dallas too. If you are developing to flip, none of the expenses are deductible until the time you sell the property so your investors will not get a deduction. If you are developing to hold, then most of the expenses are capitalized to the property. Once the asset is placed in service, then you can start depreciation. However, if you have high net worth individuals, they most likely have a high paying job and do not qualify for real estate professional (unless they meet the criteria or have a spouse that meets it). Therefore, they cannot offset passive losses with their active income.

David M. · Answer

@David Fan

Yeah, i agree most of the info is misleading...

I guess if you are doing a large, multi-million development and have use acrual accounting or something, then you might be able to claim the expenses in one year, then subsequently have the profit the following year.  But, the accounting for flips doesn't normally work that way.  Its something like "completed 'something"" accounting.  I don't remember, but you really should consult a knowledgable qualified professional about this specific.

As with most of our posts, you can't easily pass "losses" to people's 1040 return.  As mentioned, you shouldn't be investing at a loss.  Buy and hold real estate is passive income so chances of your clients taking any losses is not likely.  Again, checkout any of the other threads or consult a qualified professional.

You'd need some big deals and generate lots of depreciation to cover your income.  But, you know that depreciation has to be paid back, short of death or a like-kind exchange.

Let me ask you:  how do these high network individuals figure on getting tax deductions by working with you?

Chris Seveney · Answer

@David Fan

As others mentioned it depends on how they made their money and what the tax benefits are based on the investment

If they are a private lender that is interest income - I believe that is treated differently than as a LP in a syndication. There are some CPA’s commenting and I recommend l

Hearing their thoughts

Also as a sponsor never ever ever provide any type of tax advice to any investor

Bruce Lynn · Answer

As a partner in the deal some potential for bonus depreciation for reno before year end, but I'm not sure it really makes sense on a single family flip.  You'll probably pay it all back the next year.  Commercial investors do this because they may have 3-7-10 year time horizon.  Get the 80% of capital improvement spent in 2023 as a deduction, and not recaptured for 3-10 years.  Then do it again.  On a 3-6month flip on single family and with smaller amounts of money probably just a pain more than gain.

David Fan · Answer

Thanks again for everyone's help. I'll definitely have to consult with a CPA but I think having a JV agreement with separate entities might be the best way to offset the capital investor income. I think timing just needs to be accurate from my understanding in order to deduct.

David Fan · Answer

Would a way be to create a JV LLC entity and have them essentially be a partner in the flip. That way they have their name on title since the LLC is on title. Thank you everyone for your help!

Basit Siddiqi · Answer

If they are a lender, they receive interest income.They have no interest in the ultimate property.

Is there a way to give a private money lender or capital investor tax deductions?

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