Investor / Lender · Seattle, WA · Member since 2014 · 1k+ posts · 730 votes
If I have personal loans from family and friends (to invest in real estate), can I deduct the interest I pay to them? I recently learned that there are some interest expenses that you can't deduct, and was wondering if this was one of them?
Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
9y
@Account Closed
I see you are new to Bigger Pockets just this week, so I'll see if I can provide a little guidance for you.
Here at Bigger Pockets, you will see people talking about their investments and you will see people doing stuff you have never heard of or who do things a little differently than you do them.
The cool thing about Real Estate Investing is that there is no one right way. There is no cookie cutter approach. No "one size fits all". Real Estate Investing is as unique as each individual or group of individuals.
Coming across with your strong opinions that your opinion is the only right way is going to, quite frankly, irk quite a few people. Please note that the OP did not ask *how* to structure his agreement with friends and family - he simply asked if he could deduct the interest.
Folks gave him some additional pointers that he may not have considered regarding the topic, which is perfectly cordial and acceptable.
Your insistence that your opinion is the only right way for him to structure thing is not going to win you any friends here and, if you are looking to network, you will be unable to find folks to partner up with if you have such a narrow view of how real estate investing ought to be done.
Open your mind up a bit and allow for some other points of view and you'll do very well here.
What the OP is doing is perfectly fine and legitimate and, if that's the way he and his friends and family would like to structure things, then by all means it's not up to us to criticize that unless he asks "hey guys, what do you think of this structure?"
Note that what you are suggesting might carry the added burden of capital LOSSES for his friends and family, not just capital GAINS. A loan position is much safer and usually carries guaranteed income for the lender whereas the equity position you are insisting on shares quite a bit of risk that the OPs friends and family may not want.
Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
9y
Originally posted by @Account Closed:
Why are you being mean to them? If they are giving you money to invest in Real Estate cut them in on the deal - give them capital gains as a reward not income taxed at marginal rates
Dee,
I can see why people jumped the gun on this statement. Had you removed "cut them in on the deal" in your paragraph, it's a profound statement that I haven't thought of. The private lenders, friends and family, can really benefit from this if the borrower 1099's them. Their tax rate could be zero if they're in the lower tax bracket. Interesting suggestion. Thanks for this.
You remind me of Bob Bowling who got kicked off the site because some people couldn't handle his straight forward approach. It's unfortunate and a big loss to the community IMO.
Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
9y
Originally posted by @Account Closed:
@Albert Bui I have a fair bit of understanding of tax rules - with 20 years experience as a Corporate Tax Lawyer and Financial Planner - which is why I suggested structuring the loans in such a way as to produce Capital Gains instead of Income for the lenders.
As you have no idea of how then you need to get educated. Yes ...
LOL Ouch man tough love.
That's really interesting that you mention you have 20 years of experience as a corporate tax lawyer because I let your earlier comment slide about the OP's investments being capital gains. Didn't think it was really the time to get pedantic or start talking about the ins and outs of real estate investing and tax law when that's not what the post was about.
We don't really know what kind of investing the OP is doing with the loans from his family and friends, but with 20 years of experience in tax, I'm sure you're well aware that your argument for why the OP should structure his business "your" way completely falls apart as soon as you start to think about it.
But since you have 20 years of experience, I'm sure you are aware that with flipping, the IRS considers the intent of a transaction and so, in the vast majority of cases, flipping is considered to be ordinary income, subject to self employment tax as well as the taxpayer's marginal tax rate. Even in a joint venture, it's tough to make a case that a flip is capital gains. At the most, it is simply passive income subject to marginal tax rates.
If the OP is investing in rental properties, that income also is taxed at marginal tax rates.
The only time capital gains would come into play is if the OP is buying rental properties, holding them for a period of time and then selling them. You might also be able to make the case that flipping NPNs to performing can take on some capital gains properties.
So unless you know for sure that the OP is undertaking a rare few of a vast number of investing tactics, your whole issue with trying to convert income taxed at marginal rates to income taxed at capital gains rates completely falls apart. Most "traditional" real estate investing is taxed at marginal rates anyway.
Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
9y
well said Linda especially about the "trader," IRS designation when flipping properties being considered ordinary income which complete negates the capital gain savings position. The capital gain theory is only relevant in limited instances as most income is ordinary income as you had stated.
Investor · Philadelphia, PA · Member since 2010 · 739 posts · 372 votes
9y
Originally posted by @Account Closed:
@Albert Bui I have a fair bit of understanding of tax rules - with 20 years experience as a Corporate Tax Lawyer and Financial Planner - which is why I suggested structuring the loans in such a way as to produce Capital Gains instead of Income for the lenders.
As you have no idea of how then you need to get educated. Yes ...
LOL Ouch man tough love.
I didn't know capital gains were tax-free now. You seem like you got it all figured out
Professional · Beverly Hills, CA · Member since 2017 · 88 posts · 35 votes
9y
@Chris Purcell - there are ways to structure deals to make it work when buying from owner occupiers. (It is proprietary - if you are a JV partner then you will be shown how)
Professional · Beverly Hills, CA · Member since 2017 · 88 posts · 35 votes
9y
@Linda Weygant It will depend on the nature of the deals - there should be a separation of entities - those for doing flips and others for holding as investments. Certainly flipping will usually result in profit being tax as income. However, for certain types of acquisitions cost base structuring and deferred payments of part sums can avoid that.
The investment properties gains will be taxed at gains tax rates - and it is that activity the money investors should be paid for. Properties do not even need to be sold for them to be paid - as their positions can be sold as capital receipts and not income.
Obviously a bit of work needs to be done in how things are structured and how gains can be taken as capital instead of income. My comments are meant to enlighten people as to what may be possible - without laying out every detail. I see little reason to cast further pearls on a flock which has little understanding of Corporate Finance and who have entrenched ideas.