Tax Issue for Private Lending/Investing

[Carmen Marron]

Hi Everyone,

I'm new to this forum so I apologize if I chose the wrong forum for this post but I hope it is correct. I have a situation with some of my clients and I am trying to determine the best way to handle their situation. Here is the scenario (I'll use names so it's easier to identify the people):

1. John tells his buddy Bob that he found a great opportunity to purchase some property low and be able to turn a profit in a couple of months.

2. John asks Bob to lend him $100K and anticipates he'll pay him back $150K after flipping the property.

3. Bob tells his friends and family about the opportunity and asks them if they want in on it.

4. Bob gets $10K from 5 friends and family members and takes $50K out of his personal account.

5. Bob gives John $100K to make his investment.

6. John invests the $100K in the property. He flips it and has $150K he can give back to Bob.

7. John asks Bob if he wants his money back or if he would like to "roll" the $150K into another deal he just found.

8. Bob likes the idea of rolling the money over and so do all his family and friends so they agree to do this.

OK... let's stop here. :) Let's say all of the above happened in 2013 and the money was never paid to anyone - Bob or his family and friends because they decided to roll it into a new deal.

At this point - Bob and all his family and friends still have their money out there. Would they need to report the $50K as "Interest Income"?

Being Bob's friends and family and really lending Bob the money so he can make an investment, would they need to report anything on their taxes? I see it as they have made a loan that has not been paid back yet. Is this accurate? Bob can tell them they've made $5K each but because this wasn't actually paid to them they would not have to report it yet, right? IF Bob actually gave each person $15K back after the first deal, then would each person have to report $5K of income? Being this is money loaned by friends and family there are no formal agreements. I am trying to determine when the people lending the money would have to report income if they do at all.

I'm also trying to determine how Bob would handle these personal loans. If he tracks each deal would he give them statements showing how much they made on each deal? If money is never taken out but continues to just "roll over" then the person who lent the money would not have to report anything, right? Only when they decide to not rollover and get paid in full do they have to report anything, right?

Sorry for the very long post. I'm just trying to wrap my head around this issue being it is not a formal investment.

THANKS! Carmen