Private Lending - Passive Losses on Schedule E

[Harsha G.]

Hi All,

Is there any way to structure a private lending arrangement so that income is considered passive (by IRS standards) and can offset accumulated schedule E losses? Perhaps as a syndication or credit fund? 

[Chris Seveney]

Quote from @Harsha G.:

Hi All,

Is there any way to structure a private lending arrangement so that income is considered passive (by IRS standards) and can offset accumulated schedule E losses? Perhaps as a syndication or credit fund? 

 In 8+ years the answer to us has always been No. Its interest income - unless you wanted to run it through a C corp but then you pay corp tax first.

Other option is to use a deferred retirement account. 

[Basit Siddiqi]

It potentially can be possible if you provide your capital to a fund who operates as a private lender.
You would have to be a non-managing member in an LLC or an LP in a Partnership.
Therefore, you would have no say in items such as who to lend the money to, at what rates, etc.

Best of luck

[Ashish Acharya]

@Harsha G. Unfortunately, private lending income is not considered passive by IRS standards and generally cannot offset accumulated Schedule E passive losses. Interest income is portfolio income. If you run a lending as business, your interest will convert to ordinary income and could be passive based on your involvement.

Here’s why and what alternatives might exist:

• Real Estate Syndication or Fund: Invest in funds that generate passive rental income, which can offset Schedule E losses.
• Real Estate Professional (REPS): Qualify for REPS to reclassify rental losses as non-passive, allowing them to offset active income.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

[Tanarat Bunchom]

Structuring private lending as passive income can be tricky since the IRS typically classifies interest income as portfolio income rather than passive. However, participating in a syndication or fund tied to real estate activities might help if the income flows through as rental or pass-through income. Consulting a tax professional is key to ensuring compliance and maximizing benefits.

[Aaron Zimmerman]

I don’t see a way where this would be passive income. Like others in the post, interest income is portfolio income.

What you can do is invest a self directed IRA/roth and put this money into notes. The account will grow tax deferred.

[Ian Ippolito]

Quote from @Harsha G.:

Hi All,

Is there any way to structure a private lending arrangement so that income is considered passive (by IRS standards) and can offset accumulated schedule E losses? Perhaps as a syndication or credit fund? 

I'm not a tax advisor, so use at your own risk. There are many different types of private lending funds (and many different structures). And some of them are structured in ways where they produce passive income.