How to report profit from a "flip" that I never owned?

Question

How do I characterize/report the proceeds from a "flip"  in that I never actually owned?

Last year I loaned my best friend money to get out from under her house. I loaned her money up front to move out and get settled in her new place. I also loaned her money to cover the costs of the repairs and upgrading the house, to include her mortgage.  To secure the loan I filed a second against the house and once the house sold, I was paid out from the escrow company.

I did not receive any tax forms from the escrow company, but didn't believe I would.

I did charge her interest but how do I report the amount that I was paid out from escrow on that is above what I loaned her? In H&R Block the only place that appears to apply for me would be "other income" and which will be taxed as ordinary income.  This isn't about avoiding taxes, I just want to make sure that I am capturing it in the right place.

I don't own a business. My expenses are strictly what I paid for materials and for services to have the work done. I didn't intend to flip, and most definitely will never touch a flip again. So I don't believe I need to consider this self employment and also pay self employment tax.  But would I want to consider this in order to use the 20% pass through benefit and then expense things like mileage and cell phone?

Also, not sure if it matters, but the amount I made after expenses is greater than the gift allowance.

Thank you!

Eamonn McElroy · Answer

"if anyone has any leads on a CPA in the San Diego area that may have a chance to squeeze me in, that would be great."

@Katie Lepore might know a few people.

Good luck on getting squeezed in at this point in the game...  We're not quite in the 11th hour yet but it's close.

You might have more options filing an extension and interviewing CPAs in May or June for a summer engagement.

Eamonn McElroy · Answer

@Michelle Marshall

Sounds like a debt instrument.  Generally interest from loans and notes is ordinary investment income and gains would be capital in nature (STCG or LTCG).

I'm not seeing how you "flipped a house" here?  Only loaned money?

20% QBI deduction and expensing mileage and cell phone is available if your activities rise to the level of a 'trade or business', which requires continuous, regular, and substantial effort.  Doesn't sound like you have that here...

Make sure to run by your CPA.

Katie L. · Answer

@Michelle Marshall

I know several CPAs in the San Diego area that are well-versed in real estate investing.  Yours is a little bit of an abnormal situation, and as others have pointed out, CPAs are very busy right now that you may want to file an extension and then have more time to try to report the transaction accurately after the madness of April 15 has passed.  I will send you a message with some names for you.

*This post does not create an attorney-client or CPA-client relationship.  Readers are advised to seek professional advice.

Michelle Marshall · Answer

Thank you for all the responses! There's no doubt I'll need to get in touch and hire a CPA at this point.

I did charge her interest above what AFR was but not over $600 so I didn't issue a 1098. If I claimed the $40K+ as interest now, would I need to issue a 1098?  I was already planning to report the interest income without issuing the form. I had only loaned her the money for three months, so there's no LTCG benefit to be had.

Really appreciate it, and if anyone has any leads on a CPA in the San Diego area that may have a chance to squeeze me in, that would be great.

Cheers!

Matt Skog · Answer

As stated, it sounds more like a business strategy worth pursuing.

It's exactly the kind of structure that I like to run by some of the more receptive real estate agents in town here.

For example, I look for the "diamond in the rough" houses. The ones where the homeowners have been there for 25 years or more. It's highly likely they have paid down a large portion of their mortgages.

I step in as would an "ugly house" buyer. I'm doing everybody a favor, in convincing them to sell their home on a CFD (Contract For Deed).

Avoiding higher real estate agent fees. Not taking a lump sum payoff. Not entering a higher tax bracket. There are a myriad of reasons why it can benefit those closer to retirement.

Craig Jeppesen · Answer

You did a loan, you report it as interest income.

How to report profit from a "flip" that I never owned?

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