topic Investing in friend's business in Investors & landlords

Investing in friend's business

RBG53 — Tue, 16 Mar 2021 19:56:21 GMT

I gave money (more than a gift amount) to a friend who is flipping a house. COVID has delayed the project, so the investment in 2020 will not complete in the same year. Our agreement is an equal share in profit and loss, with no interest promised on my share. (The agreement was written and signed by both parties.) Do I need to report what I invested in my 2020 return or wait until 2021 when the project completes? Do we need to create a partnership, or do I need to create a schedule C for this project for 2020 returns?

Re: Investing in friend's business

RayW7 — Tue, 16 Mar 2021 20:42:51 GMT

If you are considered a real estate professional and filing a Schedule C, you can deduct the taxes and insurance. If you are not, you must wait until you sell the property.

Since this was purchased as an investment to fix and resell, you add the carrying costs including mortgage interest, property taxes and rehab expenses to the basis of the property. When you sell it, all of these costs (and others from the purchase) become part of the adjusted basis for determining gain or loss on the property. Property taxes are added to the basis and are not deductible on Schedule A since they are considered a business expense, not a personal one, because of the status as an investment property.

Next year you will report the sale under the investment section unless you are considered a real estate professional; if you need directions at that time, please post a new question. Until the property is sold, you do not report any expenses from the purchase or updates you have completed except as noted above for real estate professionals.

Creating a partnership is out of my scope for a recommendation and I would advise you to talk to an attorney and review the links below.

-for more information follow these links-

5 Tax Implications and Tips if You Flip Things for Profit | The ..

Limited Liability Company Taxes - TurboTax Tax Tips & Videos

Re: Investing in friend's business

RBG53 — Tue, 16 Mar 2021 21:40:14 GMT

Super helpful, Ray. Thank you so much.

Re: Investing in friend's business

Carl — Tue, 16 Mar 2021 21:46:22 GMT

You may want to look into the two (or more if applicable) of you establishing a partnership on this. A partnership files a 1065 partnership return and issues each partner a K-1 showing that partner's expenses, gains and losses on the sale. Makes things significantly easier at tax filing time, and a whole lot simpler too.

Just my two cents.

Re: Investing in friend's business

RBG53 — Tue, 16 Mar 2021 23:08:46 GMT

Thank you for the help Carl. I was thinking along those lines, but you've helped to clarify and confirm my choice.