Reporting Hard Money Income

[Kevin Schick]

Hypothetical scenerio: Lend someone $20K which they use to purchase/rehab/sell property. Deal is I get 20% of their profit. I am not listed on property deed. They clear $10K, so I now have $2,000 income.

If I have a single member LLC, where would this be reported in my 1040?

1. Interest income? Basically saying I made 10% interest on the loan of $20K.

2. Sched D, investment income? But I never bought anything and sold it?? Unless this is implied ownership of property the other person bought.

3. Not Sched E since it is not a rental property ...

And then followup question. I can do this within an S-Corp, or I can do this within the LLC. Any advantage one way or the other, since regardless this is short-term income, taxed at ordinary rate.

Thanks...

[Steven Hamilton II]

Kevin,

Since the interest was contingent, you have a few choices. If you have a single member LLC, and you are not regularly in the business of providing hard money loans you may simply include this as interest on your 1040.

2. This is not Schedule D as you did not sell anything.
3. This is not Rents or Royalties.

You can elect to file as an S-corp; however, once your business is making enough to support itself; you will be able to pay yourself a reasonable salary. However, in your situation I do not think you are at a point where it is cost effective to file an S-corp return.

-Steven the Tax Guy

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