Hard Money Lending & Federal Taxes

[Heidi Ryan]

I have just started investing money with a hard money lender. The lender takes my monies and assigns it to individual loans generally on a weekly basis. They select the loans and service the loans. I do nothing other than track the progress. I am unclear on how the interest from these loans will/can be taxed. I am doing the lending thru an LLC taxed as a sole proprietorship. I'm thinking it'll be subject to FIT and FICA/Medicare, but would prefer to characterize the income as interest/dividend income subject only to FIT. Any thoughts on how to minimize taxes under this scenario would be appreciated.