Any way to lend and be taxed at less than ordinary rates

[Kyle Pierce]

Hi BP, I have a question about private lending. I have a lender who wants to lend me 100k to use in our flipping business but was wondering if there was any way to structure the deal so the interest that he receives is not taxed as ordinary income. He would like the money we pay him to be taxed as dividends or something else more favorable than ordinary income. Would love to hear any tips. Thanks

[Carl Fischer]

@Kyle Pierce

Have him use an IRA that is tax deferred or with a Roth IRA completely tax free. That is the best way I've found.

Otherwise make him a partner and pay him a dividend. Both dividends and interest are passive income and taxed the same. Ordinary income is not the same as salary. No social security or Medicare in interest payments -so I am not sure what else can be done. 

[Michael Plaks]

@Kyle Pierce

Unless he lends you his retirement money, as @Carl Fischer suggested, which indeed is not taxed when received (and possibly never) - then he receives interest. Technically, it is called "portfolio income" and is taxed at ordinary rates.

Your lender probably confuses business income with ordinary income. Business income is taxed higher, but his income is not business and won't be taxed higher than ordinary rates.

The only things that are taxed lower then ordinary income are long-term capital gains and C-corporation income. The first one is impossible in flipping, and the second one is really complicated and only works under specific circumstances.

[Kyle Pierce]

@Carl Fischer and @Michael Plaks thanks for you input. I was able to explain it to my lender. He'll be lending out of one of his IRAs. Thanks for the help

[Carl Fischer]

@Kyle Pierce

Your welcome. Let us know if you need any further help. Good luck.