Is interest from private lending passive income?

Question

Hi,

I lent some money to 3 people last year as a private lender. I told my tax accountant that it should be considered as passive income to offset the passive loss from my rental property. But my tax accountant said it should be considered as portfolio investment income, not passive income. So we are not in agreement.

I sent this to my tax accountant

https://www.investopedia.com/terms/p/passiveincome.asp.

She sent the IRS link to me

https://www.irs.gov/pub/irs-pdf/p925.pdf

I wonder how your tax accountant treat your private lending interest?

Thank you!

Alicia

Basit Siddiqi · Answer

There is a lot of different terminology used in the tax world.Interest income, for the average taxpayer, will be considered 'portfolio income'. Portfolio income, such as interest does not have any preferential tax rates so it is taxed at your ordinary tax rates.For the average taxpayer, interest income will not be considered active or passive which the original poster is trying to claim(as passive income).You, from my understanding, are in the business of originating and buying notes. For you, you likely have crossed the level of it being a trade or business. Your interest income will be taxed differently than the average joe. For you, it will likely be business income / ordinary income(non portfolio) where it will be deemed active / passive depending on your level of participation.There are some court cases out there where people who originate 4 or more loans in a year are moreso deemed in the trade or business of lending money.It will depend on the original poster's taxaccountant to determine how he/she will treat the income.The one con of it being business income is that it may be subject to self-employment taxes.

Alicia Zhao · Answer

Thank you, all, for your feedback!

Chris Seveney · Answer

@Alicia Zhao

I agree with jay

Iinterest income = ordinary income

https://www.fidelity.com/tax-information/tax-topics/interest-income#:~:text=Most%20interest%20income%20is%20taxable,it%20or%20can%20withdraw%20it.

Basit Siddiqi · Answer

It depends on if you got to the level of a trade or busienss which would determine if its ordinary income or not.Then the amount of time you spend on the business would determine if its passive or non-passive.

Dustin Tucker · Answer

Its up to you, you could challenge it, 99% of Accountants want to avoid any chance of an audit.  Also, the Recent Supreme Court Ruling Striking down the Chevron ruling, takes away a lot of power of unelected officials, most of the IRS papers are not based on actual rules, but interpretations of code.  You can read more about it here. https://www.scotusblog.com/2024/06/supreme-court-strikes-dow...

Alicia Zhao · Answer

Hi Jay, Nice to see you here! Thanks for your input. I don't know why, but I always thought it would be passive income. Thank you! Hope you are doing well!

Jay Hinrichs · Answer

ordianry income is how i have seen it classified .