united-states contract-law tax-law real-estate partnership
Promissory Note Versus Loan Agreement for Real Estate Investment
<p>I have a friend that has been flipping houses for years and I have an opportunity to invest in one of her upcoming deals and would like to do so.  However, I am not sure what the proper way for me to account for my investment and document the deal is.  </p>

<p>I would give her the money at the start and be paid back along with an equivalent portion of the profit when the house is sold.  I see that there are websites such as <a href="https://www.legalcontracts.com/contracts/promissory-note-forms/" rel="nofollow noreferrer">https://www.legalcontracts.com/contracts/promissory-note-forms/</a> that offer Promissory Notes and Loan Agreements.  Most of these seem to focus on typical loan with interest.  Can I just add an amendment in the last step that the loan is to be repaid with the agreed upon portion of the profit?  Is there a better type of form to use in this scenario?</p>

<p>Also, how would this affect my tax return.  Clearly, it would be income that I would need to declare, but would it count as capital gains, taxable interest or something else?  Can I wait until tax season to worry about it or would it require some sort of informational return before then?</p>

<p>An agreement to carry on economic activity for a share of profits is a general partnership, unless organized otherwise, as a matter of law. You would be well advised to form a limited liability company, in which you would be a co-owner, that would set out the economic terms of the relationship and would be governed by the tax laws applicable to partnerships.</p>

<p>While this could be done in a document labeled a "promissory note" this would be a problem as you could have unlimited liability as the promissory note would probably be interpreted as a general partnership agreement.</p>
