USA Need help calculating profit on a fix and flip in Denver, CO!


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Hi there,

My business partner (Jordan) and I need some help calculating the profit for our recent fix and flip in Denver, Colorado. The first person to help will receive a Venmo for $20 for answering this :)

We, as a joint partnership, originally purchased the home for $340,000. Jordan loaned his personal funds for $200,000 and we got another loan from his dad for $150,000. Thus, we raised an extra $10,000 of equity above the purchase price to use for interest expenses.

When we bought the home, the actual cash needed to close was only $334,344.44. This is because of the earnest money deposit for $3,500 and pro-rated tax credit you receive when purchasing real estate. See buyer settlement statement here:
So, after purchasing, we still had $15,655.56 of money we had raised (from the loans) sitting in our joint account.

I had floated the earnest money with my personal funds and was reimbursed by our partnership for the $3,500. So, after I was made whole, we still had $12,155.56 in raised funds in our partnership account.

We got a third note on the home from my dad for the renovation of $60,000. We didn't have to pay interest on this loan until closing. We just gave this money directly to our contractor.

For interest costs during the project, our partnership account paid four payments of $1,154 to Jordan for the first loan, and four payments of $1,000 total to his dad for the second loan. Thus, we paid $8,616 in total in interest payments, which were paid from the money we had raised (we did not come out of pocket).

During the sale, Jordan and I also both came out of pocket to pay for certain costs. I paid for $4,800.58 of costs and he paid for $3795.00 of costs. Our plan was to make each other whole out of the closing proceeds and split the rest as profit.

We also owed a couple people at closing before counting our profits:

$300 for TC services
$1,154 to Jordan (as a lender) for a last interest payment
$1,000 to Jordan's dad for a last interest payment
$750 to my dad for an interest payment
$2,500 additional to my dad for an increase in the loan amount

We sold the home for $495,000. See sellers settlement statement here: https://imgur.com/a/BThAHlf. After closing costs, commissions, and paying off the notes, we received $67,111.90 as a wire from title. You can ignore the $267,111.90 as the wire amount, essentially our closer forgot to count Jordan's $200K loan payoff as a line item, so I just wired it to him off the top. The true gross cash proceeds from closing were $67,111.90.

From this sum of money, we paid out the costs above to the people owed at closing and were left with $52,812.33.

The questions are:

What is the actual taxable profit in this deal?

As a partnership, we still have $3,539.56 that we raised at the beginning that never got used for interest payments or reimbursing earnest money. It's just leftover equity. Is this profit? If everyone has already been made whole (our lenders, me, Jordan) at closing, then do we split this money since we over-raised? Is our accounting off somewhere?
 
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Werner Reisacher

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Please do not consider my reply as "help". It is actually just a "warning". If you would approach me as a customer, the first question I would have is - where is the legal documentation that supports all these transactions.
You are doing business under a legal entity. Prepayments out pocket, interest-free loans from family members, personal funds in the hundreds of thousands, are all indicating, that you would have a hard time passing an audit. There is nothing like a free lunch such as an interest-free loan that is not based on a legal document outlining the conditions under which such a loan is granted and repayable. In case of a bankruptcy, the lender would not be able to write off his loss as a capital loss but would be faced with a heavy gift tax and penalty bill.
And the most obvious issue I would raise to protect myself in my fiduciary responsibility - the question about the source of all this cash.
 

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