investments

[kay]

a teacher made a deal with a freind who is in the construcion buisness that he is borrowing him 100k to use for his construction business but when he sells the next house he will get 50 percent of the proffit, by the end the teacher made 70k proffit is this considerd capital gains or this need to be reported on form 1040 line 21 as other income, and is this subject to social security.?

[JAinNC]

How much time

between the date of investment, until date of return? Was this investment documented?
If it is more than 1 year, my first thought woul be long term cap gain.

Jeannie

[Bees Knees]

If you get a share of the profits, it is a profits interest in a partnership. A loan is something with a stated interest rate. 50% of the profits is not a stated interest rate. It is a share of the profits. When two people agree to share profits, you have a partnership, even if the arrangement has a termination date (when capital is returned to the investing partner).

File Form 1065. The 50% profits interest is subject to ordinary income tax and SE tax.

[JAinNC]

Hey Bees

It sounded to me as if the investor borrowed 100K from a lender to invest in the construction project. If I read that wrong, then I stand corrected. If the 100k was not a loan to the builder, an investment with 50% profit, is it still subject to SE?

If 50%of the profits had been 85000 would he have a passive loss?
Jeannie

[Bees Knees]

It sounded to me as if the investor borrowed 100K from a lender to invest in the construction project. If I read that wrong, then I stand corrected.

What is the interest rate?

Since the terms of the arrangement state that the 100K investment entitles the investor to receive 50% of the profits, it sounds to me as if the investor is a passive investor in a joint business venture. An arrangement does not have to be permanent to be called a business. Partnerships can and do exist for specified periods of time.

A loan is an arrangement where you receive interest on the money lent, regardless of whether or not the borrower makes a profit.

As to the SE tax issue, passive investors in business ventures can be subject to SE tax if it is a Schedule C or 1065 business. If it is an LLC filing a 1065, the passive investor is generally considered to not be subject to SE tax on the line 1, K-1 profits. That issue has yet to be resolved by Congress.

At any rate, if you want to call it interest on a loan, then don't try to attach the rate of return to a percentage of the profits. Sharing profits is a partnership. Charging interest is a loan. Using the terms “borrow and lent” does not turn a joint business venture into a loan. The issue is determined based upon how the investor is to be paid for risking his or her money in the business.

[JAinNC]

Bees

Okay - I got it. Thanks

Jeannie