Expert: Sandi Hargrove, EA - 2/26/2004

Question
My friend and I bought some land together 3 years ago, however only his name shows up on the all the paperwork.  I own 10% of the land.  We are ready to sell the land at a profit.  Since he is the legal sole owner, he expects to pay the taxes on the sale and then distribute the 10% of the profits to me.  Will I have to pay taxes on the 10% again?  How can i get the money without being taxed twice?

Answer
Your investment in the land is in effect a gift to your friend unless you have proof of your investment.  

Your friend's distribution of the 10% profits are a gift to you and your friend is under no obligation to do so.

Total gifts in excess of 11000 per person per year(formerly 10000) must be reported by the donor on a Gift Tax Return.

IRS may make a determination that the gifts are actually a loan and repayment of a loan.  In this case, a minimum interest rate will be taxable to the person who made the loan based on the amount of payments per tax year and the length of the loan.  This can be deemed as a tax avoidance situation and is subject to penalties and interest as well as income tax.