I am looking around for an accountant in the Portland/Vancouver area who has RE clients and can speak into how Private Money lending will be taxed. Mine seems to have taken a vacation :( Your help is appreciated.
The income from private lending will be considered interest income and unfortunately does not qualify for any deductions associated with owning an investment property. I love being a private lender but the fact that it simply increases my taxable income makes me consider shifting some of my note portfolio to multi-family perhaps...
You might find this discussion beneficial where similar question is raised:
Owning notes in your retirement account (especially self-directed Roth IRA or Roth Solo 401k) is ideal since you can have tax-free income for the rest of your life if you utilize one of these vehicles.
I don't know of any CPA who is local to you to recommend, the closest would be @Natalie Kolodij who is based in the Seattle area. You may also consider @Michael Plaks or @Nicholas Aiola . All of them are very knowledgeable when it comes to REI and work with clients remotely. And when it comes to selecting a CPA, their experience, knowledge and customer service is far more important than proximity.
That is really helpful information. I appreciate it!!!
Thanks for the mention, @Dmitriy Fomichenko
@Patricia K. I thought that Portland did not have any accountants or taxpayers. Everything is community property and free in Portland. :)
Private lending is taxed one of the two ways, crudely described below, in non-technical terms.
1. Investment. The income is taxed as interest, which means ordinary rates but no self-employment (Social Security/Medicare) tax. Business expenses are not deductible (after the tax reform), and the new 20% deduction on net income does not apply.
2. Business. All expenses are deductible, and the new 20% deduction applies. However, the resulting income is taxed as business income, which means ordinary rates PLUS 15% SE tax.
The starting point would be to decide which of the two treatments is applicable in your situation and then structure it accordingly.
Mind if I PM you with some details? I would love to make sure that I understand this.