Posted by Natalie-VA on October 12, 2006 at 22:12:01:
Short term capital gains are taxed at ordinary income tax rates, so we would each pay ordinary income tax on each of our profits.
–Natalie
Credit Partners and Tax consequences - Posted by Alex
Posted by Alex on October 11, 2006 at 20:16:10:
Hipothetical (sp?) situation, just trying to figure it out, let me know if you have experience with this issue:
Let’s say you have a credit partner whose credit is used for a purchase or construction financing transaction, for which the credit partners gets let’s say $25,000 fee. However, when the property sells, and let’s say the end profit is $100,000, and to add another variable, the profit is a short term capital gain, how do you solve the issue of the credit partner now becoming on the hook for the short-term capital gain taxes and for tax reporting all together? Any ideas?
I’ve never used any credit partners, but if I ever did, I want to make sure that I don’t put this credit partner in a bad situation. Any advice is appreciated.
Re: Credit Partners and Tax consequences - Posted by Natalie-VA
Posted by Natalie-VA on October 12, 2006 at 16:27:21:
Alex,
I’ll take a stab at this. I’m assuming that you’re saying that the credit partner holds title to the property. I’m also assuming that the credit partner is only making the 25k fee…you’re profit is 100k.
If I were the credit partner, I would only show the 25k as income. If the asset and all of the costs associated with the asset were 175k and the sales price was 300k, then the gross profit was 125k. Our deal was that I was only making 25k, so I would need to give the other 100k to you.
Of course I would have a paper trail to show that I really only made 25k, but there shouldn’t be an issue. I would be paying tax on the 25k that I made, and you would be paying tax on the 100k that you made, both at our ordinary income tax rates.
–Natalie
Re: Credit Partners and Tax consequences - Posted by Killer Joe
Posted by Killer Joe on October 11, 2006 at 20:33:55:
Alex,
You’re overthinking the situation. If I was your credit partner and was looking at a $25K fee (most likely taxed as ordinary income) and now I had to split a $100K profit with you (assuming a 50/50 split), this would be a GOOD situation. Even after paying the taxes my cut would exceed what I was hoping to make going in.
KJ
Re: Credit Partners and Tax consequences - Posted by Alex
Posted by Alex on October 12, 2006 at 19:28:29:
Natalie, this is exactly what I’m trying to figure out.
If the property is in your name (title holder), then the transaction might look like this:
Purchase price $175,000 (Natalie title holder)
Sales price - $300,000
Sales Commission to Alex (or some other deductable expense paid thru escrow)- $100,000
Profit to you - $25,000, HOWEVER, now it looks like a capital gain, rather then ordinary income!!
The only way for you as a credit partner to avoid being subject to capital gain tax is to somehow sell the property to Alex at the same price of $175,000 on an option contract, grand deed with AITD, or something else, and me immediately selling it to another person for $300,000. This way, I’d become subject to capital gains on my $100,000 profit, I would pay you $25,000 outside of escrow, which will allow you to treat it as ordinary income.
Is it too complicated? or am I missing something here?
Thanks for the help. I’m trying to structure a deal where I prefer to use somebody else’s credit rather then mine, and I don’t want to put this person in a bad situation or have some surprises in the end.