credit investor

[Trinity]

Hello,

Hello I very excited about this fabulous website.  I'm new to real estate investing and having the following opportunity I needed feedback.  Has anyone dealt with credit investors.  Explanation below.

I have a partner that buys foreclosed properties(hard money) and then sells properties to credit investors close to market value based on legitimate appraisals.  He then provides a few udpates to the properties and then resells the properties for his credit investors.

1) There is nothing illegal about this process is there?
2) Do you know of investors that use this method?

Thanks for you knowledge in advance

[Dave T]

In essence, this just flipping property.  Nothing illegal.

[Trinity]

What would be the suggestion on how to report the cash out income?
Wouldn't this just be considered a capital gain on assets for tax purposes or use the 1031 Exchange to invest in other properties.

Just want to make sure I understand this correctly.

Thanks for the reply.

[Dave T]

Property flipping is an active income business.  The profits are taxed as ordinary income, and, in the absence of a business entity, self-employment income taxes apply to the profits, too.  Income and expenses for the business would be reported on Schedule C or the tax forms appropriate to the business entity in place.

Besides your primary residence, capital gains tax treatment only applies to property held for investment use.  1031 treatment only applies to property held for use in your trade or business, or for an investment use.  Flip property is treated as "inventory" to a property flipping business.

[Trinity]

Thanks for the great info.  I do have an LLC that I'm reporting
the income under plus any expenses i'm using for my business
so hopefully those expenses will help around tax time.