Tax issues in Hard Money Lending

[Fern Jard]

Hi Guys,

Brand new here, with a question:

Can hard money lending be considered a small business, where expenses can be deducted -- just like any other business? I thought this was a given until I started reading about "passive income" and "material participation" I have been keeping track of my expenses (such as traveling to inspect properties, ensuring work is done, education, wiring fees, Title Company visits, paying my minor daughter to do some research for me, etc.). But now I wondering whether I can actually treat this hard money lending activity as a small business. I would like to benefit from some of the tax saving advantages of having small business (self employed 401k, etc.) Can it still be done? What are the limitations or gotchas?

My Scenario: This year, I have made 2 loans. the first with some cash in a savings account, $35k, in June (12% interest paid monthly), the second in August for $65k @14%, interest and loan payable in Feb 2012. This was cash pulled out from a home refinance. Total I have presently invested is $100k for 2011. If things continue to go well, I hope to put another $100k to use in 2012. Just want to make sure I do it right. Presently, I am a sole proprietor.

I would really appreciate any direction from anyone who has been in the same situation -- or knows someone who has. If this topic has already been discussed, please point me there!

Thanks, guys. Love the BP forum, but have been a lurker until now. When I got conflicting replies from 2 CPAs, I decided to register on BP and ask the question here. I know I won't be disappointed.

Warm Regards,

Fern

[Steven Hamilton II]

Fern,

I am the accountant. I represent individuals and businesses before the IRS.

Yes, hard money lending may be considered a small business. Usually you could consider the income to just be interest income; however, more often I've had many clients set up an LLC taxed as an S-corp the profits will be ordinary income to the business. This may be done very easily to offer yourself benefits in such a way.

Fern, you may read my posts everywhere on here. I can assist your here and answer any questions you may have regarding the business. This also has no effect on how you are attaining the money (through your equity line or through work).

-Steven the Tax Guy

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