How to use other people’s money

[Bradley Bismark]

Hi,

I need some advice on how to use other people’s money without creating a tax liability.

Situation is; I have a family member who is willing to lend me money toward a deal. What is the best way to receive and use that money without it creating a tax issue for me or them?

- are there certain forms to use

- should I somehow leverage my llc for the transaction?

I am based in NY state of that helps.

Any advice welcome, thanks.

[Michael Plaks]

@Bradley Bismark

Doing business with family and close friends, including borrowing, is very treacherous. Things do go wrong. It's one game to lose money, and a very different one to lose money AND create a family rift. 

This pretty serious warning aside, if they lend you money, there should be interest. It is deductible to your business, and it is taxable to them. Need a basic promissory note signed. If they're really careful about it (and they should be if you ask me), they will need to secure their loan with this property as collateral, requiring more legal paperwork. I'm not an attorney, so I won't suggest what type of document, but it's easy to google.

At the end of the year, your business will need to send them IRS Form 1099-INT for the interest they made from you. If it bothers them or you that they get back more than what they gave you (aka interest) and have to pay taxes on the money they did actually make (aka fair) - well, you can compensate them for the tax on their interest (aka gift).

The other options mentioned were:

• gift from them to you. It's nice to have a family like that is all I can say.
• them lending you money from their self-directed IRA. I guess they are not this sophisticated, otherwise you would not be asking your question. Also, close relatives are not allowed to lend you out of their SDIRA anyway.
• giving them an equity position aka partnership. Don't do that unless this is their non-negotiable condition. It increases complexity and risk tenfold for everyone.

Conventional borrowing with interest is the way to go.