Sharing equity through a promissory note is not typical or ordinary.  

Asking friends and family to lend is not out off the ordinary. 

It looks like I will have about 30K Income from my business this year on my K-1 form, 40K from "Interest Income" that was earned in a Universal Life Insurance contract that I have withdrawn (my understanding is that this is 'ordinary income and NOT capital gains). 

So you will be taxed your ordinary income tax bracket + self employment tax 2.

Rehab projects are not considered capital assets (investments), so they are taxed as ordinary income, not capital gains.

Hi Steve,Thanks for the response, if anything it's good to know that what I'm facing isn't too out of the ordinary.

If so, then I am guessing that the property holding LLCs claim a deduction for management fees, which are in turn reported on Schedule C as self-employment income.If my assumptions are correct, I wonder why you are converting passive rental income that is only taxed as ordinary income, into active self-employment income that is subject to self-employment income taxes in addition to the ordinary income taxes.   

Worth the couple hundred bucks to ensure you're covered.if what you have is a 2nd mortgage, the 'gain' may be considered interest and be akin to ordinary income.

I have done this something like 3 times.While your waiting to sell them back the house, you are holding the house and possible converting a (short term gain, or ordinary income) into a long term gain.AS far as the foundation and inspector goes, most don't have any clue what they are doing. 

The contractor would count his portion as ordinary income...not capital gains.4.