Income from an Investment through a Friend...how to declare and file on 1040?

[Seeker2008]

I loaned a friend cash to buy a classic car, restore it, and sell it for a share in the profit. The deal turned out to be a good one, and I made a good profit. I'm not sure how to document and declare the income on my 1040. I've had several ideas: interest income, capital gain, or other income.I'm wondering which one of these is the most appropriate and how exactly do I document it on the 1040.More info:This was a one-time thing and not a business. It was a cash transaction around 10k, so I want be sure to file properly since the bank probably sent reports to the IRS.I don't know how or if my friend is filing...probably a simple capital gain for him.

 

[SelenaR]

If any reports go to IRS you would get a copy. Since you got none most people would not report anything. Being the honest person you are report the profit as a short term capital gain on Schedule D.

 

[seenotes, ABOC]

You'll want to sit down and talk this out with your friend...especially if the investment loan from you to him was not documented. Did he pay you interest on the loan? If so, you'll have some interest income to report and he'll have some investment interest to deduct. If no interest was involved, the IRS could impute interest on the loan...lessening your capital gain (and his) on this investment.BTW, your capital gain could be either long-term or short-term depending on how long the restoration and sale took. One poster assumed it was short-term w/o discussing the alternative with you. An investment for over one year and you'll have long-term gain which is taxed at a significantly lower rate than short-term gain.Hope this helps.

 

[seepage336]

Many possibilities!Based on the intention of the action, the lending of money, you can report the gain either as capital gain or interest income.If capital gain, long term or short term, your intention of the loan must be obvious and you were aware of the transaction and involved, partly or entirely.All the gain is yours. The portion you share with your friend will be a deduction which will reduce your gain. You can issue your friend a 1099-Misc so he can report it on his income tax return.If interest, you simply loaned your friend and not involved in the transaction. Your friend is a party to recognize capital gain. Your share of the gain is interest income from personal loan. Your friend can report your share as interest expense which will reduce his gain.Either way, the total income gained from the transaction must balanced on both returns.