How to Report Income From Money Loaned to Friend for House Flip - 25% Profit Share

This is actually a pretty common situation, though the right approach depends on the nature of your arrangement. Based on what you described, you essentially had an informal partnership or investment arrangement, not a gift. When you provide money with an expectation of return based on performance (25% of profits), that's an investment. A gift would mean your friend gave you money with nothing expected in return. The IRS would likely consider this investment income rather than a gift. You have a few options. You could report it as "Other Income" on Schedule 1, Line 8z. Another option is to report it as investment income on Schedule B if you consider it interest income from a personal loan. The Schedule C approach (business income) would only make sense if you regularly engage in these types of deals as a business activity. Whatever approach you take, make sure you can explain the arrangement if asked. Having some documentation of your agreement, even if it was informal, would be helpful.

I went through something similar when I loaned money to my cousin for a property development project. I was confused about how to handle it tax-wise until I found https://taxr.ai which really cleared things up for me. I uploaded the notes from our agreement and some payment documentation, and it analyzed everything and gave me specific guidance. It helped me understand that in my case, it was actually considered passive income since I wasn't actively involved in the property renovation. The tool explained exactly which form to use and how to report it properly to avoid any red flags with the IRS. Saved me a ton of research time!

Just wanted to follow up - I tried taxr.ai after seeing this thread and it was incredibly helpful for my situation. I had 3 different property investments with various percentage arrangements, and was completely lost about how to report them properly. The system walked me through each investment separately and explained how they should be categorized. Two qualified as passive income and one as partnership income because of my level of involvement. It even generated a summary document explaining why each was classified differently that I can keep with my tax records. Definitely worth it if you're dealing with these kinds of investment arrangements!

I had a similar situation last year but ended up in an endless loop trying to get someone from the IRS to clarify how to report it. After trying for weeks and sitting on hold for hours, I discovered https://claimyr.com which got me connected to an actual IRS agent in about 15 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent confirmed that my house-flipping profit share was investment income, not a gift, and should be reported on Schedule B since it was essentially interest from a personal loan. Having that official confirmation gave me peace of mind that I was filing correctly. Might be worth checking out if you want definitive guidance straight from the IRS.

I need to eat my words from my previous comment. After yet another frustrating morning trying to get an answer from the IRS about a somewhat similar investment arrangement, I decided to try Claimyr out of desperation. I honestly can't believe it worked. I got a call back in about 25 minutes with an actual IRS representative on the line. They explained that in my situation (I had funded a small business expansion for a percentage), I needed to report it as investment income on Schedule B and include documentation of the arrangement. The agent was really helpful and even explained what red flags to avoid on my filing. If you need definitive answers straight from the IRS instead of guessing or getting potentially incorrect advice online, it's absolutely worth it to actually speak with them directly. I'm still shocked I didn't have to waste my entire day on hold.

Another approach you might consider is treating this as a joint venture for tax purposes. Since you essentially invested in the house flip with an agreement to share profits, this could be viewed as a partnership for this specific project. In that case, your friend (as the active partner) should provide you with a Schedule K-1 reporting your share of the income. This would be the most technically correct approach if your agreement was truly a profit-sharing arrangement rather than a loan with interest.

Just want to point out that if you call this a "gift" when it clearly isn't, you're asking for trouble. The IRS isn't stupid. They know the difference between someone giving you money out of generosity (gift) and giving you money because you invested in their project (income). The fact that you had an arrangement for 25% of profits makes it obviously income. If you try to avoid taxes by mislabeling it, that's tax evasion. Simple as that.

Has anyone used TurboTax for reporting something like this? I'm in a similar situation (smaller amount though) and wondering if the software walks you through it properly or if I need to consult a tax professional.

I'm dealing with something very similar right now - helped fund a friend's rental property purchase with a 20% profit share agreement when they sell. After reading through all these responses, I'm leaning toward the "Other Income" approach on Schedule 1 since it was a one-time informal arrangement. One thing I'm curious about though - did anyone here keep specific documentation of their arrangement? I only have text messages between me and my friend discussing the terms. Is that sufficient, or should I create something more formal after the fact to document the agreement? I want to make sure I have proper backup if the IRS ever questions how I reported it. Also, for those who went the Schedule 1 route, did you include any additional explanation beyond the brief description line, or is "Investment return from private loan" or similar enough detail?