How to tax investment money for real estate

[brl24]

What is the name of your state? California

I invest in real estate, and have some friends and family members that would like to give me some money to invest, and we've decided on a return and even some profit sharing they will earn on that money. The investment amounts will be from a $2-20k. What is the best way to handle the money for tax purposes when they give it to me, and then when I pay them out their return, profit sharing, and eventually, the principal investment? Thanks.

 

[dallas702]

Start a Nevada corporation and run all the investment through it. No NV corporate taxes; no sharing of info with the IRS; protection of assets, the profit is calculated within the corporation, distributed, and then each officer claims his income (profit after all expenses) on his own federal taxes. Best of all, you don't pay those ridiculous CA taxes.

 

[Snipes5]

If you follow that person's advice, do save some money to cover the expense of defending yourself against tax evasion/fraud charges.

The state of CA is very aggressive.

Better to create an investment partnership instead. Then there are no corporate taxes to begin with.

Snipes

 

[dallas702]

Bullsh*t snipes;

Hundreds of thousands of people have NV corporations for just those reasons. There's no evasion of taxes if done properly.

 

[brl24]

Thanks for the replies. Someone else I asked mentioned treating them as personal loans. Does that make sense, and how would that work?

 

[dallas702]

You could do that, but when the proerties are sold you have to account for that profit. If you take it all on your personal income you might not be able to write off the borrowed/invested money, therefore making your net capital gains larger and subject to more tax, both federal and state.

There's a lot of things people can pool their money in to create some profit, but real estate has many more rules and ways for the taxes to be assessed.

 

[abezon]

The NV (S) corp/LLC/partnership will work fine to avoid CA taxes, but only if the land purchased is in some other state. Every state has a right to tax income from real property situated in its borders, whether the owners live within that state or not.

If you buy CA land, you'll pay CA taxes on the income & so will your partners. If you buy in Boise, Idaho, you'll pay Idaho non-resident taxes AND will pay taxes on the income to your state of residence (CA).

 

[brl24]

CA.

Thanks again, I think I'm going to form an LLC in either Michigan (anyone know how I do this in Michigan?), where my rental properties are, or Neveda, but what do I use for an address if it's in another state? For Michigan, I can use one of my properties, but what about NV?

Back to my investment plan, if I use an LLC and take the investments, that I mentioned previoulsy, in how is that taxed when I pay them out? Do they make the checks out to the LLC and I set up a new bank account for it specifically? Any more advice or suggestions are greatly appreciated.

 

[John Carson]

All I know is that if you set up an S corporation with shareholders, you have to learn what a K1 form is. At the end of each tax year you send a K1 to each of your shareholders listing the profit or loss due to rental income, sale of business properties and other taxable events during the year. You also put the percentage of ownership in the corporation on the K1 for that shareholder. The shareholder then multiplies each itemized total loss or gain by his or her percentage of ownership and then puts his or her share of those gains and losses on their own personal 1040 tax return. Everything flows through from the corporation to the shareholders, S corporation pays no tax. Talk to your accountant.