Repair Money Viewed As Taxable Income
I'm into my second rehab project and I've opted to be the General Contractor so the title company will release the repair money to me.
My hard money lender put $21,000 in the escrow and my contractor is only charging $11,500.00. The remaining will be given to me.
I have not formed a business entity as of yet so I will have to deposit this money into one of my personal accounts. Is there anyway I can avoid having this viewed as income at the end of the year?
No. Not only is it taxable as ordinary income by both the federal and state authorities, but it is also subject to federal self-employment income taxes.
Thanks for the information. Does anyone have advice on how I should handle this for future deals?
The previous poster's info is wrong. This money will not be considered income because it is money taken from a loan. A loan that is charging you interest, I might add. Borrowed money does not count as income. Your income is decided when you sell. It is your sell price minus your purchase price + fixup costs. Of course, when you sell or refinance, you'll have to payoff that loan where the money came from.
My suggestion to you would be to take that money and pay it back to the HML because it will be $11.5K less that that high interest will be using to tack on to.
Roger
Thanks Roger
That's what I intend to do. The hard money lender that I use always loans 66% of the APR Value, even if you don't need it.
raj,
I see your point. I was viewing the money taken out as the general contractor fee, which would usually be ordinary income to an independent general contractor.
I was a little too narrowly focused here and did not look at the structure of the deal as simply overfinancing the purchase and improvement. Same result when receiving cash back at closing.
Thanks for righting the ship.
Why would it be income? It is money that is borrowed for which there is an obligation to pay back. This should not be any different than going to a bank and borrowing money some of which you use to fix up your house and the remainder you put in your bank account. There is no income to be reported here.