Tax rate / treatment for short-term profit on security agreement

[Philip Pape]

I am taking back a second lien on a property undergoing renovation. In a simultaneous transaction, I am entering a security agreement with the owner for a share of any profits from sale and (if applicable) rental, which is substantially more than if I charged interest on the note. Renovations are being completed within the next few weeks, at which time the property goes on the market.

Scenario 1 - The property is sold, my note is paid back, and I receive 20% of the net profit

Scenario 2 - The property is re-financed, my note is paid back, and the property is rented. I receive 20% of the cash flow (net profit). Later, it's sold and I receive 20% of the net profit.

This is purely a money deal on my end (no involvement in rehab or rental).

Question - If the property sells quickly (say, within 3 months), and since my profit is paid through a security agreement (I never have title to the property), how would this be treated for tax purposes? Is this simply an investment with capital gains?