Taxes with hard money lenders

Austin, Texas
Tax, SDIRAs & Cost Segregation
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Taxes with hard money lenders

Glenn N.
austin , TX · Member since 2015 · 60 posts · 5 votes

How do hard money lenders that do not put them selves out to the public and lend only to 3 individuals I know that have LLC's. You pay federal taxes , how about local taxes ? The llc's are in Florida but I live In Texas .Thx U

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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Quote from @Glenn N.:

Yes Joshua I do some hard lending small amount as I said to some people I know. Right now treating it as interest but would like to make it active income to do a solo 401k . Im not sure if I do enough to call it active but it's my only gig right now since I retired .No involvement , I go check on the property in Colorado on occasion to check it out the condition.

from my decades of doing this you pay income tax to the state you live in.. So if Texas has no state income tax I dont think you pay tax on any loans in other states. I could be wrong though.. I just dont recall in my lending years doing income tax in any other state than the one I live in.. Of course in the JV deals I do where we come into title I pay tax at the state level if there is tax.

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  • Joshua ThompsonBusiness Member
    Accountant · Melissa, TX (Remote) · Member since 2017 · 210 posts · 135 votes
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    Hi Glenn, 

    Typically hard money lenders depending on their situation and if they do it as a business treat the income as interest income or business income. Now there are a lot of factors that can come into play but I'm not completely sure what you're asking here. Are you the hard money lender? Do you have any other involvement other than providing funds? 

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  • Glenn N.
    OP
    austin , TX · Member since 2015 · 60 posts · 5 votes
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    Yes Joshua I do some hard lending small amount as I said to some people I know. Right now treating it as interest but would like to make it active income to do a solo 401k . Im not sure if I do enough to call it active but it's my only gig right now since I retired .No involvement , I go check on the property in Colorado on occasion to check it out the condition.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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    Quote from @Glenn N.:

    Yes Joshua I do some hard lending small amount as I said to some people I know. Right now treating it as interest but would like to make it active income to do a solo 401k . Im not sure if I do enough to call it active but it's my only gig right now since I retired .No involvement , I go check on the property in Colorado on occasion to check it out the condition.

    from my decades of doing this you pay income tax to the state you live in.. So if Texas has no state income tax I dont think you pay tax on any loans in other states. I could be wrong though.. I just dont recall in my lending years doing income tax in any other state than the one I live in.. Of course in the JV deals I do where we come into title I pay tax at the state level if there is tax.

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  • Glenn N.
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    austin , TX · Member since 2015 · 60 posts · 5 votes
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    Thank you Jay, yes in Texas we do not have state tax but we might have some local taxes I might have to pay.

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  • Joshua ThompsonBusiness Member
    Accountant · Melissa, TX (Remote) · Member since 2017 · 210 posts · 135 votes
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    Quote from @Glenn N.:

    Yes Joshua I do some hard lending small amount as I said to some people I know. Right now treating it as interest but would like to make it active income to do a solo 401k . Im not sure if I do enough to call it active but it's my only gig right now since I retired .No involvement , I go check on the property in Colorado on occasion to check it out the condition.


     You might be able to treat it as business income if its substantial enough. It would be a great conversation to have with your tax advisor and financial advisor for the solo 401k. 

    Depending on how much you'll like to contribute to this retirement account keep in mind the self employment taxes you may need to pay of 15.3% and age if contributing to a traditional not roth type retirement account.

    I agree with the above based on your answer you most likely won't have issues in FL.

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  • Glenn N.
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    austin , TX · Member since 2015 · 60 posts · 5 votes
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    Thank you Joshua,. Right now interest is in the 6 figure.I spend a great deal of time on it with the contracts and accounting . I believe that he might want to move the Florida loans to Colorado I just found out but Im very hesitant to do it and putting all my eggs into one basket. He is supposed to go public sometime. yep the set employment tax Ill have to look at , I would max out the best I can with the income and age 65 and over contribution to a roth .

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  • Chris SeveneyBusiness Member
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    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
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    @Glenn N.

    Same as jay you pay taxes on the state you are in.

    If you were to foreclose take it back and sell it then you pay taxes in that state as well as its real property you own

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  • Glenn N.
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    austin , TX · Member since 2015 · 60 posts · 5 votes
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    OK , thank you Chris .I appreciate the info.

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  • Jason MalabuteBusiness Member
    Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 899 votes
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    Hi Glenn, interest income from loans is generally taxed at your marginal tax rate as ordinary income. Whether you classify it as business or personal income depends on the nature of the lending activity. If it’s substantial, it might be considered business income. Joshua’s point about local taxes and solo 401(k) options is spot on—it’s worth discussing with your tax advisor for a tailored strategy. Hope this helps

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  • Glenn N.
    OP
    austin , TX · Member since 2015 · 60 posts · 5 votes
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    Thank you Jason.

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