What Type of Deal Are You Investing in
Most crowdfunding portals offer two types of deals: (1) debt deals; and (2) equity deals. Both can have different tax consequences, so understanding what type of deal can be critical to understanding the tax ramifications.
An equity deal is one where the investor typically owns shares in a limited liability company (“LLC”) that invests into another LLC that holds title to real property. The investor holds essentially an indirect equitable interest and will participate in the financial upside (or possibly downside) of the property. The property could be a “flip” or a buy and hold.
But in a debt deal, the investor owns an interest in a promissory note issued to a real estate entity that is looking for financing on a project. The note is collateralized by real estate and investors do not have an equitable interest in the property. They are merely acting like a lender and are receiving interest payments according to the agreement. This type of transaction is different from an equity deal and, accordingly, the tax implications can differ.
The investors do not own part of the actual loan itself. Instead, investors purchase shares of a mortgage-dependent promissory note, or “MDPN”. This is an unsecured note in which an investor receives stated interest and principal, provided the borrower makes payment on the underlying loans. The investor does not own the underlying property and their name is not on the property title or loan documents. In other words, when you invest in a debt offering, you buy shares of a unsecured note, the MDPN. The note is tied to the performance of the underlying loan which IS secured by the property.
Most crowdfunding portals offer two types of deals: (1) debt deals; and (2) equity deals. Both can have different tax consequences, so understanding what type of deal can be critical to understanding the tax ramifications.
An equity deal is one where the investor typically owns shares in a limited liability company (“LLC”) that invests into another LLC that holds title to real property. The investor holds essentially an indirect equitable interest and will participate in the financial upside (or possibly downside) of the property. The property could be a “flip” or a buy and hold.
But in a debt deal, the investor owns an interest in a promissory note issued to a real estate entity that is looking for financing on a project. The note is collateralized by real estate and investors do not have an equitable interest in the property. They are merely acting like a lender and are receiving interest payments according to the agreement. This type of transaction is different from an equity deal and, accordingly, the tax implications can differ.
The investors do not own part of the actual loan itself. Instead, investors purchase shares of a mortgage-dependent promissory note, or “MDPN”. This is an unsecured note in which an investor receives stated interest and principal, provided the borrower makes payment on the underlying loans. The investor does not own the underlying property and their name is not on the property title or loan documents. In other words, when you invest in a debt offering, you buy shares of a unsecured note, the MDPN. The note is tied to the performance of the underlying loan which IS secured by the property.
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