Structuring A Partnership With A Promissory Note

[Liam Galbraith]

Hi BiggerPockets Community,

I am looking into how to structure a real estate deal through the use of a promissory note. The situation is this: I will find and manage the deal, while my passive investor partner only wants to put up the capital for the down payment. I will take out the mortgage under my name.  We will split everything 50/50. I will then pay my investor a quarterly dividend for their half of the profits. 

We would like to structure the deal through a promissory note that states all of the terms and partnership structure. However, I don't understand how the process works once it comes to the financing stage. My questions is:

1. Once we have the note signed, and my investor gives me the capital for the down payment, is this just considered a 'gift' I put into my bank account and must be filed and taxed as a gift payment if I want to take out the mortgage under my name?

All help is appreciated thank you!

[Derek Dombeck]

It would not be a gift. It's a loan that should be secured by the new property or an existing property. 

It is called a "participation loan" and you need to make sure there's language in the note describing the participation as well as drafting a mortgage with default terms and the lenders rights.