I am partnering with my brother-in-law on a house flip. I will provide him with the cash he needs to purchase the home with seller financing, I will provide the funds to fund the flip, and we have agreed to split the profit when the house sells. He found the deal and is doing a lot of the work on the flip and I’m pretty much hands off. So I’m just the money in the deal. When we sell I’m assuming I will have pay taxes based on my normal tax rate. Is this a correct assumption? Is there anyway to protect that income from being taxed at my regular rate which is 35%?
Generally flipping will be taxed at ordinary income rates. However, speak to your CPA to see whether your situation is actually a flip or a short term investment.
Based on the face value of the facts provided, I believe it's more likely than not you and your brother have formed a general partnership for federal income tax purposes. This means that next year the joint venture will file a Form 1065 and issue K-1s to both you and your brother if there are items of income, deduction or credit from the venture. The bad news is that all partners in a GP are subject to not only income taxes but also self-employment taxes if the activities of the partnership generate self-employment income. It does not matter if you are a silent, capital partner -- it's the way the law on SE taxes was written for a general partnership.
It may be advantageous to form an LLC and write yourself into the operating agreement as the functional equivalent of a limited partner. That would allow you to avoid SE taxes on your distributive share from the partnership. Your brother is a different story however. Based on what's been provided in your OP, he won't be able to avoid SE taxes but may be able to mitigate them by holding his interest through an S Corp.
The income from the venture will be ordinary, which means it's taxed at your marginal income tax bracket. That can't be avoided. It's also more than likely passive income for you and subject to the 3.8% Net Investment Income Tax. If you have passive losses from rentals they can offset this new passive income.
If this joint venture goes beyond one house and balloons to three or four or more a year, you and your brother should both consult professionals. Plenty of opportunity for planning here.