Tax question regarding hard money loan

4 Replies

A friend and I both provided half of the capital for a hard money loan used to flip a house.  He is a real estate agent and got to list the property as part of the deal.  In addition to the interest income I received on my principal, my friend shared his commission from selling the property with me.  What is the correct way to classify this part of my income from the deal?  What paperwork/records do I need to keep for tax purposes, both for the loan and the shared commission?  Thanks in advance for any advise!

Originally posted by @Jonathan Smith :

A friend and I both provided half of the capital for a hard money loan used to flip a house.  He is a real estate agent and got to list the property as part of the deal.  In addition to the interest income I received on my principal, my friend shared his commission from selling the property with me.  What is the correct way to classify this part of my income from the deal?  What paperwork/records do I need to keep for tax purposes, both for the loan and the shared commission?  Thanks in advance for any advise!

If I understand correctly, this was not your deal - you guys merely funded it, plus your friend listed it.

There are two parts to that. For the interest, you need a simple record of what you received (bank statements will do), supported by the promissory note and amortization table that you used to calculate the interest. I also recommend that you issue Form 1098 to the investor who borrowed your money, each of you for your respective halves. You will report it as interest, on Schedule B.

The interest you received on your private loan is not automatically reported to the IRS by anyone, so the IRS normally does not question the extra income you report on your tax return of which they had no prior knowledge. But having supporting records is always a good idea, just in case.

For the commission split, your friend needs to issue you Form 1099-MISC reporting what he paid you. I recommend that he uses Box 3 - "other income", to not expose you to the self-employment tax for this amount. I presume you did not "work" to earn this amount. You will report it as "other income" on Line 21 of your tax return.

Also, your friend has to be careful splitting commissions with a non-licensed person. It could be illegal.

When I saw that he split the commission with you I felt that might be illegal as well .

Paying non licensed agents is illegal in most every state I ever worked in.. probably not legal there.. this one might be mattress money and the payor probably does not want to issue a 1099 that will be all the evidence the state would need and he could most defiantly lose his license or get it reprimanded.. maybe he just pays the tax's and you give him a little money back to help pay for his income tax.. just a thought.. probably nothing will come of it. .but you never know

I appreciate the replies.  We'll get the situation rectified.

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