How to report income on hard money bridge loan repaid to me?

Question

Q1: How do I report the interest passive repayment interest income from a hard money-bridge loan I made to a flipper?

Q2: How do I report the profit and expenses from the sale of a flip?

Walchli Donna · Answer

Thank you Ashish for your thorough reply and including the IRS Form info. That was very helpful. I did eventually form an LLC with my investor colleague referenced in my bridge loan query. Though he is “professional” Real Estate Investor and Realtor, I am neither of those categories. Thus, as I am at this point a ‘hobbyist’ and not a professional I presumed I would simply report whatever minimal profit or loss realized on this first joint flip project as pass through income. I imagined I needed to generate some sort of statement for him to write-off the interest on the bridge loan and figured I probably needed a statement form to reflect the proceeds from the joint venture flip. I was having difficulty researching the mechanics for how to actually report to the IRS and on what forms. Again, thank you BP Community!

Ashish Acharya · Answer

1: How to report interest income from a hard money-bridge loan?

The interest income you receive from a hard money loan should be reported as ordinary interest income on your tax return. Typically, you'll report it on Schedule B (Form 1040), which is used for reporting interest and dividend income. If the borrower provides a Form 1099-INT, you will use the amounts reported there.

Q2: How to report profit and expenses from the sale of a flip?

For a flip, the profit is treated as ordinary income, not capital gains. You should report the income and expenses on Schedule C (Form 1040), as it is considered part of an active business. You can deduct all expenses related to the flip (e.g., materials, labor, holding costs), and the net profit will be subject to both income tax and potentially self-employment tax.

If you run lending as a business, then interest income changes to ordinary income. You should consider the right kind of entity structuring to avoid SE taxes on your profit. S-Corp analysis needs to be done.*This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Chris Seveney · Answer

@Walchli Donna

As an fyi next time you do this use a licensed loan servicer and charge it back to the borrower - it’s $25-$30 / mo and they handle all the payments and loan balance as well  handle all the tax documents as well.

Walchli Donna · Answer

Thank you all for your responses.  Clearly, I will find a CPA but I'm trying to get ahead of the game and prepare all the things I'll need for tax filing next year.  From the answers above, I gleaned that:

- I am not in the Lending Trade or Business Lender.  Thus the $3000K interest I earned from my hard money personal loan to my investor friend is considered "Portfolio Income" and will be reported and taxed at my personal tax rate.  Which IRS Form do I need to generate and give to my investor friend so he can deduct the $3000 on his taxes and what IRS Form do I need to generate to report my $3000K income on my taxes?

Cory Vitale · Answer

@Basit Siddiqi hit the nail on the head. @Chris Seveney is also correct in saying "it depends." If you have a partnership structure or some other facts and circumstances around the loan that indicate you are extending it in the capacity of a trade or business, it will be considered ordinary income.

Keep in mind that the tax rates will not differ between ordinary and passive income unless you sell the loan for a gain/loss. Absent that, the big differences will be which forms you report the income, your ability to deduct business expenses against the income, and applicability of self-employment taxes.

I have a client who wrangled with this question in particular and we were able to get it all sorted out pretty quickly.

Basit Siddiqi · Answer

If you are not in the trade or business of lending, the interest will be considered portfolio income.If you are in the trade or business of lending, the interest will be considered ordinary income.

Chris Seveney · Answer

Having been in the lending space for a while now,  Interest income is not passive - its considered/taxed as ordinary income- just like interest you receive from your bank and savings account.

Regarding profit and expenses from a flip, "that depends" on many factors but again if its short term capital gains, its not tax friendly.

As always consult with your tax advisor / CPA.