Taxes on Private/Hard money loans?

6 Replies

Does anyone have professional guidance regarding how taxes work regarding private lenders or hard money lenders?  I was on both sides of this question last year and have not yet filed my taxes.

Two scenarios to consider:

1.  I borrowed $100,000 @ 8% for 12 months, ending April 2017.  I've paid this in full when I sold the property.  Is the full $108,000 a deductible expense on the Flip?  Is there any required documents I'll need to provide my accountant?

2. I loaned $40,000 to another investor at 20% interest.  I was in 2nd position and they were desperate...  I received full payment in September 2017.  Do I have to claim the $8,000?  If so, how do I report it?  Ordinary income? Capital Gains?  What documents will I need to provide, if any, to my accountant?

Thanks in advance!

Ronny

@Ronny Crawford

You borrowed 100k and paid 8k in interest. Not sure what your profit was but give both HUDs purchase and sale to your accountant she/he will explain it to you. 

You should always report income. most likely the borrower, at a minimum, will report the payment of interest on 1040 personal return  or other entity return and tie to you. You should show it as income on your 1040 return as well. Talk to the accountants involved and 1099-int and/or 1098 forms may also be required. 

Thank you Carl.  I have both HUDs for the Flip to provide my CPA.  Side bar, I cleared $80,000 on the Flip prior to taxes, after paying back the $108,000.  I've set aside 30% in case I owe that much for the Cap Gain for holding less than a year.

1. Only the interest is deductible, not the principal payment.

2. The interest you received is interest and you would report that as ordinary income.  Same as any other interest, typically documented with a 1099-INT.

@Ronny Crawford

Not sure why you're asking us and not your own CPA. Especially what documents he will need. Probably should have him explain various concepts that you seem to be confused about.

1. Profit on the flip has nothing to do with borrowing and repaying loans. Interest and fees are an additional deduction, but that's it. Everything else is calculated as if the whole deal was done in cash.

2. There is no capital gains when we talk about flips. It's business income, subject to ordinary tax rates PLUS self-employment tax.

3. You absolutely claim $8,000 as income. How you report it? At least two different ways: either as interest or as business income. Each has its pros and cons, that's why it's a question for your CPA. Not a capital gain.

@Ronny Crawford

1. I borrowed $100,000 @ 8% for 12 months, ending April 2017. I've paid this in full when I sold the property. Is the full $108,000 a deductible expense on the Flip? Is there any required documents I'll need to provide my accountant?

The $8,000 is an interest expense deduction and will be used to lower the gain on your flip.

2. I loaned $40,000 to another investor at 20% interest. I was in 2nd position and they were desperate... I received full payment in September 2017. Do I have to claim the $8,000? If so, how do I report it? Ordinary income? Capital Gains? What documents will I need to provide, if any, to my accountant?

You should report this interest income on your tax return. Please note that if this was a mortgage and the property was in another state than the one you live in - the interest income may be considered sourced to another state.

If you continue to issue notes - you may be considered in the business of loaning money and the income characterization would change from portfolio interest income to ordinary income.

Thanks all...

I may be looking for a new CPA this year is why I have all the questions.  My current one seems way too busy all the time.  I tried twice last year to set an appointment to just discuss how to prepare for this year's taxes and can never get a call back from his office.  He also expects you to mostly know your stuff to be in and out of his office quickly during tax season.  He is good, but always overbook booked.

I do not have a business set up yet, which is another question I have for him or my next CPA.

Thanks again to each of you for your responses. 

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