How to avoid paying taxes on received capital

Question

Hello everyone, I have a question. I am about to receive $100k from a family member for the sole purpose of real estate investing. With the money I plan on putting down money on a multi unit.
my question is how do I avoid having to pay taxes when receiving this money since it is technically going to be for business?
this family member wants to give me the money and not have to think about it again, so leaving it in their account and using it as needed is not really an option.

Kory Reynolds · Answer

If you are actually just borrowing, write up a simple loan agreement between the two of you.  Put down an interest rate at least equal to the applicable federal rate based on the term of the loan, put down the repayment terms, and sign.  Done deal, it's a loan.

Now treat it like one - you get an interest deduction when you pay down on the loan, they have interest income.

If it is a gift, then state as such, and we can help you sort that piece out as well.  It all depends on the nature of the payment.  The IRS doesn't just assume because someone received a payment that it is income that you need to then reach out to prove it to them - people receive loans, cash out refinances, gifts, etc, all the time.  Just document what happened in writing, stick to what was written, and all is good.

Jeff Nash · Answer

@Joseph Palmiero put it succinctly - if there is no obligation to repay your family member (i.e.- it is a loan) and you are not acting in any capacity as an agent or principal (i.e- using the money received to invest for them with the expectation of providing them with a return - like a general partner) then you yourself have no tax considerations but your family member does.  Loans, gifts, and capital received are not taxable to the recipient.  I would suggest that you document this arrangement in writing so that there is no misunderstanding later.

Dan H. · Answer

I am not a CPA so take this as layman explanation but using laymen terminology.

There is an amount that can be gifted annually with no consequence and no need to maintain tracking.  Without looking it up it is near $17k/year.

If gifted more than that ($100k is more than the annual limit) the difference counts against the estate gifting and I believe is referred to as lifetime gift.  So using $17k (recognizing I did not look up exact value), the $100k gift has $83k of lifetime gift.  The sum total of this lifetime gift is to stay below ~$12m (estate tax exemption) otherwise there will be taxes to pay.  The gift giver (gifter) has the responsibility to track these lifetime gifts. Also the $12m limit is set to expire in a few years and may revert to a lower amount.

What this means to you is you have a gift with no responsibilities.  The gifter has the responsibility to keep track of the lifetime gift and ensuring they do not cross the estate tax exemption amount.

For those with net worth that may be over the limit at time of death (and because no one really needs ~$24m as a couple), you can gift the annual amount to minimize being over estate tax exemption.

Any CPAs want to correct anything I was not correct on?

good luck

Joseph Palmiero · Answer

The money will not be taxable to you.

Your family member may need to consult an attorney regarding Gift Taxes and consider the impact on elder care planning depending on their age.

Basit Siddiqi · Answer

Being a custodian and holding / managing money for another person is not taxable to you.The only exception would be if you are being compensated in some way for managing their money.

Dante Barnes · Answer

So if she sends the money to my account, wouldn’t the bank immediately report it to the IRS?

Allan Smith · Answer

Um. This is not how taxes work.

you don't pay taxes on money you borrow. Only on income that you earned somehow, or from selling assets.

How to avoid paying taxes on received capital

Most Popular Reply