1098 to borrower for S-D IRA interest?

Question

I have a self-directed IRA. I collect interest on loans made out of that account. Does the custodian or I have the requirement to send a 1098 to the borrower?

I should at least keep track of that and let the borrower know, yes?

Dmitriy Fomichenko · Answer

@Paul Winka

The custodian has nothing to do with this, they have zero responsibility regarding 1098... if your CPA doesn't know the answer (or doesn't want to find the answer) and instead points his finger towards them - you should consider finding another CPA.

My understanding is that you don't have to send 1098 form because you are not in the business of lending money.

Paul Winka · Answer

@Shera Gregory Yes, it is my responsibility for the 1098. I've been unable to get a definitive answer on the 1098 though. I have to laugh though, I am in a loop...my CPA says talk to the self-directed IRA custodian. Self-directed IRA custodian says talk to the CPA for what to do. I agree, keep track of all interest received, whether I am taxed on it or not and provide a report to the borrower. If I am a decent lender at all, I should have this data anyway.

I am surprised more folks have not weighed in on this thread. Must be too busy doing tax preparation to answer questions about taxes. :)

Paul Winka · Answer

Sounds like a no then, I am just a small timer.

I'll keep track of the interest for my own sake but just rely on the borrower to calculate his own interest then. But this all came about getting 2016's taxes ready. One borrower asked me for a 1098 for his tax prep. It's not my worry, but what "proof" would the borrower have of what interest he paid if the IRS came asking? To him, it's a legitimate tax deduction for his home flipping business that for me is just a way to grow my SD-IRA.

Bryan Scrivener · Answer

Pretty sure the answer is no. It isn't a transaction at all really. And, if it were a transaction, it would only be prohibited if it involved a prohibited person. If he's loaned money to a prohibited person the account is already subject to voiding regardless of the 1098.

Bill B. · Answer

@Bryan Scrivener

I was thinking more along the line of providing a service for his sdira property.

The same way he can’t paint or do lawn maintenance for the property. Mailing these out is a service the ira would otherwise have to pay for.

So he’s providing a service for his property which he isn’t supposed to do. Maybe the iRS cuts him some slack because he’s helping them. But if he was mailing out statements I would guess that would invalidate his whole ira?

Dmitriy Fomichenko · Answer

@Paul Winka, you can provide him with some kind of statement showing interest received for the loan.

Bill B. · Answer

I wonder if him mailing out the 1098s for the ira would be a prohibited transaction voiding the tax free status of his entire account?

Dmitriy Fomichenko · Answer

@Paul Winka

Being in the business of lending money means that you are running a business of lending money, i.e. mortgage broker.

Paul Winka · Answer

Re: "you are not in the business of lending money".

In your context, what would constitute being in the business of lending money? Would that be filing a Schedule C for the lending business with the 1040, or a certain dollar threshold?

Shera Gregory · Answer

I would expect this to be your responsibility. I don't see how the custodian would be able to (or want to) keep track for all of their clients. They would have no way to know if money coming into an account is from rent, interest, etc.

1098 to borrower for S-D IRA interest?

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