Private lender taxes

[Neil Andrews]

I am new to real estate investment and plan to start out as a private lender. I just closed on a HELOC on my private residence. The interest rate is currently 4%. I plan to loan money to established successful real estate investors at about 12%. I am concerned about the taxes involved. Will I have to pay FICA self employment taxes on my profits in addition to income taxes? Can that be avoided by setting up an LLC or S-corp? Do I even have to set up an official business entity to loan money to someone I know? My chiropractor does some real estate investing and he said that if you buy and sell a property in less than 24 months, you do have to pay FICA tax on the profits. In my case, I will just be funding the deals so I don't know if the FICA tax rules apply in that case.

My HELOC is only $100,000 which should be enough to fund a deal in my area. I eventually plan to transfer my 401K into a self directed account and use that to fund deals as well.

[Victor N.]

I need to correct my earlier post somewhat. It was late and I was tired. The federal tax information is correct if you are only lending and not participating in the project as a partner or joint venturer. However, interest income and lending fees ARE subject to Kansas state income tax even if the loan is made from a Kansas LLC. Under current Kansas law, self employment income reported by a sole proprietor or pass through entity (LLC etc) is not subject to Kansas state income tax. Of course, interest income is not self employment income (sale of goods or services)