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Updated 12 months ago on .

User Stats

28
Posts
9
Votes
Margaret Feit
9
Votes |
28
Posts

Is Mortgage Interest Income in Partnership Subject to Self-Employment Tax?

Margaret Feit
Posted

I have a Partnership that is primarily in the business of buy and hold rentals and also has some funds invested in multifamily syndications. Last year I sold a property and used the funds to purchase a set of 3 land loans in the name of the partnership, which have been paying mostly interest and a little principal on a monthly basis. The income from these loans makes up about 10% of the partnership's gross income for 2023 (but will likely be a larger percentage in future years). My loan processor sent 1098s to the landowners on my behalf, but I did not receive any tax forms. 

I know this interest income is taxable, but my question is whether it is also subject to self-employment tax. My understanding is that interest income derived "in the ordinary course of a trade or business" is considered business income and is subject to SE tax. But does the fact that the income comes to a partnership, which is a trade/business for other purposes, necessarily mean that this interest income is trade/business income? Or since it is a long-term investment and not the primary source of partnership income, could it be considered interest income that would not be subject to SE Tax (as if I had received a 1099-INT)? If the latter, and if I continued to purchase mortgage loans or otherwise lend money, is there a definitive point at which I can no longer reasonably argue that I am not in the business of lending money?