Hi BP experts,
First of all, thank you so much for all the knowledge you've shared. I've read a lot about "passive" vs "active" income and how "passive income" is taxed as capital gain and "active income" is taxed as ordinary income. I'd appreciate your inputs on how the below situations as different financing options on a flip is taxed .
1) I sign a check for a flip deal. I don't get involve in any other way. I have have a deed, a promissory note, and a Joint Venture Agreement. The agreement is X% interest monthly, and Y% of the net profit [ARV - (Purchase price + Reno + Closing fee)]. The net profit sharing % is specified in the Venture Agreement. Are both of these returns taxed as ordinary income as they involved with an active income of the flip?
2) If I am simply a private lender, with X% interest only, and no Joint Venture on the net profit, how is this taxed?
3) For HML, how is the return/gain taxed?
4) How is the loan returned in HML? If a HML loaned a $100K at 10% for 4 months, how is the return of the interest and principal typically done? An example is appreciated.
Not exactly....”passive” income is not taxed as capital gains, it is ordinary income.....interest on a loan for example, just not subject to ss/med. A percentage of profits from a flip is also ordinary income but also subject to ss/med since flipping is taxed that way.
For your loan example, at the end of 4 months you get your $100k principle back, no taxes, and $3,333.33 in interest.
@Wayne Brooks. Thanks for your reply. So, it looks like interest/profit earned from private lending in flips will be taxed as ordinary income no matter how the lending is structured.