Reporting rental income and ST Cap Gains on shared investment

[The208Accountant]

A family including mother, father and two adult sons decide to buy an investment property. Each child put $10,000 toward the purchase - the parents covered the remaining amount with funds borrowed from the Heloc on their primary residence. The investment property is in the parent's name. 

The home was purchased at the end of 2021. The prior owner will be renting the house through March of 2022. When the prior owner moves out, the family will renovate and sell the property. 

I am not sure how to handle the two son's investment and return. I assume the rental and the disposition will go on parent's return. Will the son's return on investment be paid in the form of interest?

Any thoughts?

[BobKamman]

"the parents covered the remaining amount with funds borrowed from the Heloc on their primary residence."  

And that could be anywhere from $58.32 to $2 million.  Always more fun to answer questions here, when guessing is allowed.

But is the amount of the investment relevant, anyway?  What is their agreement?  Partnership agreements don't have to be in writing, but it's always a good idea.  Just because they're related doesn't mean they are allowed to avoid good business practices.   

[The208Accountant]

I'm not sure what their agreement is. Lets say the parent's agree to divide the profits (from both rental income and capital gains) as follows: 10% to each of the two sons and 80% to themselves...

In this case, would the parents report this as interest expense on the Schedule E, and on the disposition, then issue a 1099-INT's to the sons? 

[TaxGuyBill]

First question ... what are they intending to do after this sale?  Are they planning on doing it again with another house?

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@The208Accountant wrote:

 Each child put $10,000 toward the purchase  ... the family will renovate and sell the property. 

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If the children are also renovating it, their "investment" is not just money, it is also labor, so I don't see how it could all be called "interest". 

[Accountant-Man]

Interest expense? So the sons LOANED the money to the parents and they don't own 20% of the property?

Is there a written loan document? What is the stated interest rate?