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I'm Anne I've been preparing taxes for 27 years and I'll be helping you today.
It sounds like you have created a partnership with this other individual, and that unfortunately you were given some incorrect advice.
There is always at least 1 General Partner. This is the individual that actually carries on the business (which sounds like you in this business) and THAT person is subject to Self Employment tax, (known as SE tax or SS tax)
The other person in this scenario is what is known as a "Limited Partner". A Limited Partner is someone who invests capital into the business, but does not actually provide any service to the Partnership. This person does NOT pay SE tax on his investment. He is (hopefully) paid back his original investment plus some interest. However, as an investor only, there is no SE tax.
The only excepton to this is "Guaranteed Payments"
Close. You will pay SS tax on YOUR earnings, not on his. His earnings will come back to him SS free.
You posted"I have created a real estate LLC. I have a financial partner, who not a member of the LLC. He loans the capital to purchase. We then split the profit on the back. I have been informed that it would be better for him to take interest income on the loan rather than profit split - due to 15% SS Tax. Is this correct?"
Your arrangement is a loan with this person so the "profit split" is going to be handled as interest and for this person that is generally better for tax because it is ordinary income and not subject to SS and Medicare (or Self Employment tax) unless he were in the business of making loans.
So your answer would be yes, but the payoff is going to be handled that way anyway because it is an additional amount on the loan you are paying back.