1099 for Friends and Family on Private Loans?

Question

Has anyone out there done an extensive amount of raising private funds as small loans ($1,000 to 35,000) from friends and family members with interest paid on the loans?

For a private loan that I use to invest in real estate and then pay back with interest (lender gets only interest, no equity in deal), do I need to send the lender a 1099 showing how much interest they received?

Are there any other legal implications to using privately borrowed money to invest in real estate that I should be aware of?

I live in Colorado (Erie) and will likely be investing out of state (OK, MO, OH, AL, OR)

I believe consulting with a CPA or lawyer would be wise on this, but looking for some general opinions on how much paper work needs to get done so the IRS does not come knocking at my door.

Thanks!

Kyle J. · Answer

You don’t send the lender anything to report the interest paid. If the loan is secured by real property, they might have to send you a 1098 Form. However, there are exceptions even to that. For example, if the interest received was less than $600, if the interest was received from a corporation or partnership, etc.

Even if you don’t receive a 1098 form, you can still claim the interest you paid as a deductible expense (assuming it is one). So make sure you track how much you pay back. (Just the interest is deductible, not the principal payback.)

As always, I recommend you should have a tax professional on your team to give you advice specific to your unique situation.