Taxation for private lender on fix and flips

[John Pauler]

I am looking for help on tax implications for two flips I invested in passively with slightly different terms. For both of these, I was completely passive, simply supplying the capital and waiting for my return. 

FLIP 1:  20% fixed interest. Deal closed January 2018 and was paid out 13 months after initial investment (120% of initial investment) . 

FLIP 2: pro-rated share of upside created. Deal closed January 2018 and was paid out 14 months after initial investmen (117% of initial investment). 

I am pretty sure I will get hit with taxation at ordinary income rates for FLIP 1, because this is a simple interest structure, but am not sure about FLIP 2. My original thought was this would be a capital gain, but the more I read about it, it sounds like the IRS never treats flipping as a capital gain, but rather as a business activity. My question is whether that changes when you are a passive investor, and not the one driving the project. 

Can anyone with more expertise weigh in on this, specifically answering...

1. How will these two flips be taxes?

2. Is there anything you would recommend in the future for more favorable tax treatment? 

Thanks for the help!

[Jon Holdman]

Profit from fix and flips is ordinary income.  Fix and flips aren't investments, so no capital gains involved.  Both your deals will be taxed as ordinary income.

If you have a complex tax situation like this you really need a knowledgeable accountant.  There are probably expenses incurred during these deals that you can offset at least a bit of the income.