Passive Investor - How to report on tax return?

[Mike Steffen]

One of my friend has business of flipping houses. He offered me to invest in his business on profit sharing. I will be just an investor and will get my money back with profit once he sells property after fixing it. 

How do I report my income on my tax return? 

Does he need to issue 1099? Do I have to pay social security tax/Medicare tax on this extra income? 

If he sells property after a year - can I report this as long term gain? 

I would appreciate if someone can help us.

Thanks.

[Ashish Acharya]

Originally posted by @Mike Steffen:

One of my friend has business of flipping houses. He offered me to invest in his business on profit sharing. I will be just an investor and will get my money back with profit once he sells property after fixing it. 

How do I report my income on my tax return? 

Does he need to issue 1099? Do I have to pay social security tax/Medicare tax on this extra income? 

If he sells property after a year - can I report this as long term gain? 

I would appreciate if someone can help us.

Thanks.

You are considered a limited partner if its a partnership. He will file a partnership return and you will receive your share of Income/loss via K-1. If you at truly limited, the income that gets to you is not self employment  income and is not subject to SE taxes. 

If he has an S-corp, the income that gets to you is never subject to SE taxes. You are consider one of the owners of the S-Corp. You will get K-1 once he files S-Corp return.  

Both of this is considered passive income for you. If you have rental loss, this income from flipping partnership can be sheltered with passive loss.

It is an ordinary income, not capital gain no matter how long he hold the property.