Tax question for group!

[Jon Thomson]

OK question for the group:

Let's say I own an LLC that does fix and flips. In this scenario, I purchase the property for $100k and sell for $200k. I use $40k from a personal HELOC to fund improvements. Excluding all other deductions, the government would see this as a $100k profit and tax me at short term capital gains rates. I, of course, have to pay back the $40k that I took out for the loan, which reduces my actual profit to $60. So, speaking SPECIFICALLY on owner contributions, can the $40k be excluded from the taxable income since it is not actual profit and rather a loan that has to be paid back? I'm aware that interest charges and other expenses are used to reduce the taxable income. I'm just asking about owner contributions. Because, correct me if I'm wrong, if I cannot exclude that, I'm essentially paying capital gains tax on the loan amount? Thank you in advance for you time!

[Ricky A.]

You buy something for 100 and sell it for 200, your gain on that asset is 100. Simple as that. It doesn't matter how you finance it.

Follow the money:

- Say your starting bank account balance is 60K.

- You borrow 40K. Now your balance is 100K.

- You buy a property for 100K. Now your balance is 0.

- You sell the property for 200K. Now your balance is 200K.

- You pay back the 40K loan, and your final bank account balance is 160K.

You bank account increased by 100K reflecting the 100K profit you made on the flip.  The loan principal doesn't matter.