Which 1099 should I receive for capital gains as a passive investor in real development?

[heybrian]

I earned nearly 30% on a cash loan to a real estate developer. What 1099 should he provide when my cash principal and gains are returned to me? 

I plan to use that 1099 for my next year's TurboTax filing. 

Thank you, 

Brian

[tagteam]

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@heybrian wrote:

I earned nearly 30% on a cash loan to a real estate developer. What 1099 should he provide when my cash principal and gains are returned to me? 

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You really should contact the developer and inquire to be absolutely certain, but if the transaction was actually structured as true debt (i.e., a loan with a specific interest rate), then what you received was interest, not capital gain. 

In that respect, you should be aware of the substance of the transaction and your participation in it, so you need to specify exactly how the deal was structured. 

[heybrian]

There was no interest rate set. My contribution was about 10% of the entire cost, so I am entitled to get 10% of the total project net profits. The project took longer than one year, so should be a long-term capital gain. What 1099 would work in this case? 

[tagteam]

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@heybrian wrote:

There was no interest rate set. My contribution was about 10% of the entire cost, so I am entitled to get 10% of the total project net profits. The project took longer than one year, so should be a long-term capital gain. What 1099 would work in this case? 

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Based upon a scenario where you made a 10% contribution and were entitled to get 10% of the profits as a result, there would be no 1099 that would  work.

An agreement to share profits basically creates a partnership; you should be getting a K-1.

[heybrian]

Thank you for your help on this. 

[Carl]

Just keep in mind that overall this is pure speculation. For all we know you may have invested in an REIT (Real Estate Investment Trust) and depending on how it's set up, you could be receiving a 1099-DIV, 1041-K1, or any number of other possibilities. You really need to ask the administrator of whatever you invested in, to get a definitive answer.

But overall it really doesn't matter since TurboTax can handle whatever it is you may get.   Additionally, if there is no payout to you in 2019 then it's perfectly possible you won't get anything at all and not have to report anything on this either. It's somewhat common (well, not that common but not infrequent enough to call it rare) that if an investment does not produce income in a tax year, then no tax reporting document is issued and reporting is not required.

[TomYoung]

And, finally, you may receive no informational return, (1099, Schedule K-1, etc.), at all.  It's not uncommon that many deals are done on an "informal" basis and the participants only receive some amount in the form of a check, and nothing more.  You should make sure that you understand how things need to reported on your own income tax return in any case.

[heybrian]

Hi @Carl    This is not a REIT so I imagine a 1099-DIV won't work. I simply provided capital as passive investor for an equity stake in the profit. As this project has lasted for longer than one year, I'd like to record it as a long-term capital gain. Someone previously mentioned a K-1 would work. As to your other point, there will indeed be a distribution in 2019. Do you agree with K-1 in this case?  Thanks!

[heybrian]

HI @TomYoung  That is a good point about possible not receiving any documentation. 

That said, I'm hoping to record this as a long-term capital gain from a passive investment. It's not a REIT, just invested capital with an associate (who is also learning the game-- thus the research on my end.)  

From your experience, would TT Premier still be able to handle this, or would I need upgrade to the Self-Employed.  I'll probably reach out to an accountant, but as I enjoy filing with TurboTax, I was hoping to get some pointers before I went the professional route.  

[TomYoung]

Premier has all the utility you need for your situation.  The Self-Employed version only gives more hand holding and more directed interviews for independent contractors/sole proprietors, and that's not anything you need here.

[Carl]

"Do you agree with K-1 in this case? Thanks!"

What I may or may not agree with doesn't come into play here. It's what tax law may or may not require and that's all that matters. This all depends on how whatever you invested in is set up. Then based on that setup, it matters if you are what I would refer to as a "silent partner" (I forgot the legal term) or not.

For example, if you invested the money in a multi-member LLC that business would most likely issue you a 1065 K-1 and as a silent partner any payouts to you would be reported in box 4 because if your investment gives you any percentage of "ownership" in the business, then you are required by law to take what is referred to as a minimum distribution. Other income if passive could be reported in box 5, 6a thru c and even box 7.  Heck, depending on the setup it could be in practically any of the boxes 1-10. It just depends on how the business is set up and your contractual relationship with the business..... and that's just for a multi-member LLC. An 1120-S K-1 is totally different as the boxes are not all the same as on the 1065 K-1.

But overall the main thing is, TurboTax will not have any problem dealing with your situation no matter what kind of tax reporting document you may get, and no matter what box or boxes on that document any income and/or losses may be reported in. We can sit here and speculate all day. But only the person that is reponsible for the business taxes can give you any definitive response as to what tax document you may receive and what boxes any income/losses would be reported in.

[Rick19744]

Based on the most recent facts provided by @heybrian you have the following:

• You provided equity into a venture.  You need to understand what type of entity structure you invested in; partnership, LLC taxed as a partnership, or something else.
• If the entity is a pass-through entity you will receive a K-1 each year from this investment.  The K-1 will then be used to prepare your individual 1040.
• You don't have any capital gain unless the entity generates a capital gain OR you sell your investment.
• The length of the project will dictate how the entity needs to report the income, loss, etc. which will flow through to you via the K-1.
• If this is a pass-through entity you need to make sure you maintain a basis schedule of your investment.  This starts with your capital contribution and is updated annually for the applicable lines on the K-1.
• Once again, unless you sell your equity position (investment) you don't have any capital gain unless the entity generates a capital gain.
• You need to understand if you are receiving any type of preferred return.  If so, you need to understand how that will be reported.  This could be a guaranteed payment.  If that is the case, you need to meet with a tax professional to understand the tax implications so there are no surprises or hard feelings.

[heybrian]

@Carl @Rick19744  Thank you for that insight. I researched further and this is indeed a pass-through LLC. I will request a K-1 Form 1065.  But should payouts be recorded in Box 9a (Net long-term cap. gains) rather than of Box 4 (Guaranteed payments), since I am a passive investor and the original investment was in 2017?   An accountant may be consulted, but good to hear other opinions on the mater, as time allows.

[TomYoung]

I think you need to gather every single document you have surrounding this venture and seek some professional help now, in the "doldrums" of the tax season's ebb and flow. 

A "pass through" entity means that the entity itself pays no taxes.  Instead it "passes through" it's activity to its shareholders/partners so they can report that activity on their own income tax returns.  The entity reports this activity on a "Schedule K-1" sent to the shareholder/partners who then transcribe that information into their own income tax returns.  Understand that this reporting is generally independent of distributions, ("payouts").

Distributions to shareholders/partners, most of the time, represent returns of capital, reducing the shareholder's/partner's basis.  The principal exception here is "Guaranteed payments" which counts as income to the recipient.  Guaranteed payments to shareholders/partners are independent of income or losses of the entity.  They ensure that a shareholder/partner  gets a particular amount for specific services provided or for the use of capital.

The other shareholders/partners do have an incentive to report distributions to a particular shareholder/partner as guaranteed payments as that reduces the net income of the entity and means that the other shareholders/partners report lower income on their own income tax return.