Taxes with hard money lenders

[Glenn N.]

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

[Joshua Thompson]

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? 

[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.

[Jay Hinrichs]

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.

[Glenn N.]

Thank you Jay, yes in Texas we do not have state tax but we might have some local taxes I might have to pay.

[Joshua Thompson]

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.

[Glenn N.]

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 .

[Chris Seveney]

@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

[Glenn N.]

OK , thank you Chris .I appreciate the info.

[Jason Malabute]

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

[Glenn N.]

Thank you Jason.

[Zack Jensen]

Hey Glenn, 

Hard money lenders who only lend to a select few individuals, like those with LLCs, typically operate privately and do not advertise their services publicly. They often have personal connections with their borrowers and provide loans based on relationships rather than a broad market approach. When it comes to taxes, the federal tax obligations for income earned from lending (interest income) apply regardless of where you live. If the LLC is registered in Florida, the income generated through the LLC would generally be subject to federal taxes, but Florida does not have a state income tax, which can be beneficial.

However, the key question is whether you, as a Texas resident, need to pay any local taxes on the income from lending through your Florida-based LLC. Texas does not impose a state income tax, but you might still be subject to other local taxes depending on the structure of your LLC and your business activities. In general, any income earned by the LLC is passed through to you personally if it's a pass-through entity (like an LLC), and you would report it on your federal tax return. If you're actively participating in the business of lending, you may also be subject to self-employment taxes.

It's a good idea to consult with a tax professional who understands both Florida and Texas tax laws, as well as LLC taxation, to ensure you're compliant with both federal and any applicable local tax obligations. You might also want to confirm the exact nature of your LLC's tax classification (e.g., disregarded entity, S-corp, partnership), as this affects how your income is taxed. Hope this helps!