I recently acquired my first rental property. At closing, there was $10,700 in equity that I pulled out of the property. I split that profit 40/60 with my business partner (she finds the deals and if I close it, she gets a cut).
My question is this, the check was made out to my loan officer, not to me. How does this effect me? Will I have to pay taxes on that money or will the loan officer?
You bought a rental property, and we assume that you still own it. You overfinanced it, so you had cash left on the settlement table which you split with your partner (is the loan officer your partner?).
Meanwhile the money you borrowed still has to be paid back – even the money that was cashed out of the equity. Borrowed money is not taxable income to you because it has to be paid back.
If your partner took a “commission” on the deal, then your partner has taxable income.
Tell us again how you made a “profit” if you have not sold the property? Are there some details missing that would change our perception of your transaction?
Perhaps I used the wrong wording. We did cash out the equity and my loan officer is my partner (she finds the deals, we decide if the deal is good for us and we split the difference). She did earn a commission for processing the loan. So, if i understand correctly, we will not be taxed on the monies received from cashing out the equity because it is borrowed money rather than income?
Exactly.
All you did was cash out some equity in the property. You took out a loan for more money than you needed to purchase and/or improve the property. I assume the loan is in your name alone and that you alone are responsible for repaying the loan.
The borrowed money you gave to your partner may be taxable income to your partner, but it is not taxable income to you. You will have to repay all the money you borrowed. Your taxable profit is not calculated until you sell the property.
If your partner is in fact on title and will share in the expenses for and income from the property, then your partner’s share of the borrowed money is not taxable income to her either. Instead, she (like you) will share in the sale profits when the property is sold, and will incur a tax liability on her share of the sale profits.
Thank you so much. This really helps. 