Need Tax/CPA Help! [Investor Money]

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Need Tax/CPA Help! [Investor Money]

Tyler McDaniel
Flipper/Rehabber · Tampa, FL · Member since 2015 · 19 posts · 4 votes

Hey Everyone,

So I have a few private money investors that want to be part of my deals.  We are going to structure the deal where they loan the money and get interest until the sale or refinance.

We want to hold the money in my LLC account until it is deployed into a property but what are the tax implications of this? What if we have a Promissory Note spelling out exactly when interest will begin to accrue and maybe another Promissory Note for when the property is purchased so there will be collateral.

I know legally it can be done but tax-wise how would this be done? 

Thanks!

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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
8y

I agree with @Paul Allen that uncollaterized interest is immediately deductible. Or rather, interest not allocated to a specific property.

Further, I think it is debatable whether the interest during the flipping process must be capitalized, as @Ashish Acharya stated. It's only the case if UNICAP applies, as @Brian Schmelzlen mentioned. It does not apply to most low-volume flippers.

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    8y
    Originally posted by @Tyler McDaniel:

    Hey Everyone,

    So I have a few private money investors that want to be part of my deals.  We are going to structure the deal where they loan the money and get interest until the sale or refinance.

    We want to hold the money in my LLC account until it is deployed into a property but what are the tax implications of this? What if we have a Promissory Note spelling out exactly when interest will begin to accrue and maybe another Promissory Note for when the property is purchased so there will be collateral.

    I know legally it can be done but tax-wise how would this be done? 

    Thanks!

    I am in the same boat. It is pretty simple. 

    From a tax perspective, there is no impact whether you have a  collateral or not. Also, there is no tax impact until you sell the house. 

    Simplified steps:

    1) You collect money, put it in your LLC. execute an agreement among the investors regarding interest rate and when it is due. The payment schedule has not tax impact( lump sum at the end of the deal or every month)

    2) if you are flipping this property, you will add the total interest that will be paid to investors to the cost of the house (basis). 

    3) When you eventually sell the house, you will get to deduct the interest expense as the part of your basis in the house. This decreases your profit. 

    Remember, you just can't deduct the interest in a year you pay it if your flip starts in one year(2018) and finishes in the next year(2019). You have to wait until you sell the house to get a benefit of the interest expense. 

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    1Reply
  • Brian Schmelzlen
    Accountant · La Mesa, CA · Member since 2017 · 477 posts · 476 votes
    8y

    For tax purposes, neither the receipt of a loan nor its repayment are taxable events. Obviously the interest paid would be deductible by the LLC (unless 263A applies- flips- in which case it gets capitalized) and picked up as income by the lenders.

    You should have a promissory note that spells out all of the details.

    1Reply
  • Tyler McDaniel
    OP
    Flipper/Rehabber · Tampa, FL · Member since 2015 · 19 posts · 4 votes
    8y

    @Ashish Acharya

    Thank you!

    So if the investors want to hold the money in the LLC account before a purchase that will not change anything correct? As long as all of this is spelled out in our promissory notes?

    1Reply
  • Tyler McDaniel
    OP
    Flipper/Rehabber · Tampa, FL · Member since 2015 · 19 posts · 4 votes
    8y
    Originally posted by @Ashish Acharya:
    Originally posted by @Tyler McDaniel:

    Hey Everyone,

    So I have a few private money investors that want to be part of my deals.  We are going to structure the deal where they loan the money and get interest until the sale or refinance.

    We want to hold the money in my LLC account until it is deployed into a property but what are the tax implications of this? What if we have a Promissory Note spelling out exactly when interest will begin to accrue and maybe another Promissory Note for when the property is purchased so there will be collateral.

    I know legally it can be done but tax-wise how would this be done? 

    Thanks!

    I am in the same boat. It is pretty simple. 

    From a tax perspective, there is no impact whether you have a  collateral or not. Also, there is no tax impact until you sell the house. 

    Simplified steps:

    1) You collect money, put it in your LLC. execute an agreement among the investors regarding interest rate and when it is due. The payment schedule has not tax impact( lump sum at the end of the deal or every month)

    2) if you are flipping this property, you will add the total interest that will be paid to investors to the cost of the house (basis). 

    3) When you eventually sell the house, you will get to deduct the interest expense as the part of your basis in the house. This decreases your profit. 

    Remember, you just can't deduct the interest in a year you pay it if your flip starts in one year(2018) and finishes in the next year(2019). You have to wait until you sell the house to get a benefit of the interest expense. 

    Thank you!

    So if the investors want to hold the money in the LLC account before a purchase that will not change anything correct? As long as all of this is spelled out in our promissory notes?

    1Reply
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    8y
    Originally posted by @Tyler McDaniel:
    Originally posted by @Ashish Acharya:
    Originally posted by @Tyler McDaniel:

    Hey Everyone,

    So I have a few private money investors that want to be part of my deals.  We are going to structure the deal where they loan the money and get interest until the sale or refinance.

    We want to hold the money in my LLC account until it is deployed into a property but what are the tax implications of this? What if we have a Promissory Note spelling out exactly when interest will begin to accrue and maybe another Promissory Note for when the property is purchased so there will be collateral.

    I know legally it can be done but tax-wise how would this be done? 

    Thanks!

    I am in the same boat. It is pretty simple. 

    From a tax perspective, there is no impact whether you have a  collateral or not. Also, there is no tax impact until you sell the house. 

    Simplified steps:

    1) You collect money, put it in your LLC. execute an agreement among the investors regarding interest rate and when it is due. The payment schedule has not tax impact( lump sum at the end of the deal or every month)

    2) if you are flipping this property, you will add the total interest that will be paid to investors to the cost of the house (basis). 

    3) When you eventually sell the house, you will get to deduct the interest expense as the part of your basis in the house. This decreases your profit. 

    Remember, you just can't deduct the interest in a year you pay it if your flip starts in one year(2018) and finishes in the next year(2019). You have to wait until you sell the house to get a benefit of the interest expense. 

    Thank you!

    So if the investors want to hold the money in the LLC account before a purchase that will not change anything correct? As long as all of this is spelled out in our promissory notes?

     Yes, 

    If there is no interest provision before actually using the money, nothing has to be done. 

    Once the money is used to buy the property and rehab is started, the interest is tracked if paid every month and added to the basis of the property assuming you are flipping a property. 

    [email protected]941-914-7779
    INVESTOR FRIENDLY CPA®5241 Reviews
    WebsiteView Page
    TaxMD™ | AI-Powered Tax Planning
    WebsiteView Page
    1Reply
  • Paul Allen
    Financial Advisor · Virginia Beach, VA · Member since 2017 · 502 posts · 508 votes
    8y

    Is this true even if the purchased property is not used as collateral on the loan? I thought uncollateralized loan interest could be written off as an operating expense in the year taken. Is this not the case for flipping?

    1Reply
  • Tyler McDaniel
    OP
    Flipper/Rehabber · Tampa, FL · Member since 2015 · 19 posts · 4 votes
    8y
    @Ashish Acharya Awesome, I really appreciate all the insight! Thank you so much!
    0Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    8y

    I agree with @Paul Allen that uncollaterized interest is immediately deductible. Or rather, interest not allocated to a specific property.

    Further, I think it is debatable whether the interest during the flipping process must be capitalized, as @Ashish Acharya stated. It's only the case if UNICAP applies, as @Brian Schmelzlen mentioned. It does not apply to most low-volume flippers.

    2Reply
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    8y
    %Originally posted by @Michael Plaks:

    I agree with @Paul Allen that uncollaterized interest is immediately deductible. Or rather, interest not allocated to a specific property.

    Further, I think it is debatable whether the interest during the flipping process must be capitalized, as @Ashish Acharya stated. It's only the case if UNICAP applies, as @Brian Schmelzlen mentioned. It does not apply to most low-volume flippers.

    Are you underestimating that he cannot make more than $25 Million this year? :)

    Right, completely forgot about the threshold. 

    [email protected]941-914-7779
    INVESTOR FRIENDLY CPA®5241 Reviews
    WebsiteView Page
    TaxMD™ | AI-Powered Tax Planning
    WebsiteView Page
    2Reply
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