How is income from private lending taxed? How does REPS impact this?

[Cliff T.]

Hi all,

Can anyone provide some guidance on how income from private lending is typically taxed? My understanding is that if I'm NOT considered in the business of loaning money, then the income is considered interest income and taxed at my marginal tax rate for both federal and state. However, if I do more loans and are considered "in the business of loaning money", then the income would be taxed as business income (ie. ordinary income).

Related to the above, if I qualify for REPS, could the income from private lending be theoretically canceled out if I have losses from other RE projects, rental properties, etc?

[Michael J.]

I can provide some general guidance on how income from private lending is typically taxed, but please keep in mind that tax laws can vary by jurisdiction, so it's always a good idea to consult with a tax professional or accountant who can provide specific advice based on your individual circumstances and the tax laws applicable to your location.

In general, if you engage in private lending as an individual and are not considered to be in the business of loaning money, the income you earn from private lending would typically be treated as interest income. This interest income is generally taxable at your marginal tax rate for both federal and state taxes. It would be reported on your personal tax return (e.g., Form 1040) and may be subject to self-employment taxes as well, depending on the specific circumstances.

However, if you are deemed to be in the business of loaning money, the income you earn would be considered business income or ordinary income rather than interest income. This means that it would be subject to the regular income tax rates applicable to business income, which could be different from the rates for interest income. Additionally, if you are in the business of loaning money, you may have additional tax obligations, such as the need to file business tax returns and potentially pay self-employment taxes.

Regarding your question about the Real Estate Professional Status (REPS),  I am not a tax professional, and the information provided here is for general guidance only. The tax implications of private lending and the interaction with other real estate activities can be complex, so it's crucial to consult with a qualified tax professional.

In general, if you qualify as a Real Estate Professional and meet the requirements set forth by tax laws, you may be able to offset the income from private lending with losses from other real estate activities. However, the specific rules and limitations can vary depending on your tax jurisdiction and the details of your situation. A tax professional can provide you with more accurate guidance based on your specific circumstances and the tax laws applicable to your situation.

Again, I highly recommend consulting with a tax professional or accountant who can provide personalized advice tailored to your individual circumstances and the tax laws of your jurisdiction.