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Updated almost 7 years ago on . Most recent reply

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John T.
  • Lakewood, OH
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How to tax a co-investor?

John T.
  • Lakewood, OH
Posted

Hey all,

I have an interesting situation that I will need to deal with next year. My father is a year from retirement and has decided to withdraw his 401k to help me buy some additional investment properties. The deal is we will split the investment and profit, however I'll be responsible for all the paper work. Pretty good deal for him, right?! Anyway when I file taxes next year I realize I'll be claiming 100% of the income on my taxex, but I had planned on adding his portion of the profit as a loss on my schedule E, perhaps as a management expense. In doing this, what is the correct way to go about it? I don't have a business account or federal tax ID for the business since it has just been me thus far.

Can I just 1099 him at the end of the year for what I have paid him? Isn't there some law where if he doesn't pay tax on the 1099 it would become my liability? Please advise!


Thanks,

John

Most Popular Reply

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Michael Plaks
#1 Tax, SDIRAs & Cost Segregation Contributor
  • Tax Accountant / Enrolled Agent
  • Houston, TX
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Michael Plaks
#1 Tax, SDIRAs & Cost Segregation Contributor
  • Tax Accountant / Enrolled Agent
  • Houston, TX
Replied

@John T.

Looks like your father's position is that of a private lender or passive investor, as opposed to a partner.

Even though he is your father, you really should define economic rules between the two of you. Your 50/50 profit concept is very superficial and does not consider lots of possibilities.

  • What if there is an extended vacancy?
  • What if there is an extensive repair needed?
  • What if there is a natural disaster?
  • Does your father always get his investment paid back in full, even if you sell at a loss?

There is so much more that needs to be considered if you care about preserving family peace and protecting your respective investments.

And how exactly do you calculate profit to split? Based on actual cash flow or on tax calculations - which are mutually exclusive?

Your tax liability is not a factor for him. Whatever you pay him - HE will pay taxes on it. You pay taxes on what is left for you, presumable your half, in whichever way you calculate it.

Some of my colleagues will disagree, but I maintain that individuals do NOT issue 1099-INT, ever. This is a form for financial institutions only, in my opinion. What you should issue instead is 1099-MISC, Box 3 "other income". You do need to obtain an EIN - it is free and instant on the IRS website.

  • Michael Plaks
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