Lending for flips and dealer status with irs

[Giedrius C.]

After paid consultations with high profile CPA's who specializes in real estate I have contradicting answers to my question, I wonder what bigger pockets folks think about it.

Question is will irs assign dealer status to private lender who lends money for flips? One answer was that no, because interest is not subject to self employment tax, another answer from different cpa was that if it is continuous activity that brings significant % of person's income, then yes, the person will be treated as a dealer and his income will be taxed with self employment tax. What do you think? 

[Eamonn McElroy]

It might just be me, but I don't like the term dealer in this context, and I think it's adding a lot of confusion to OP.  A dealer essentially means: one who buys and sells with regularity in the course of their trade or business.  Does a lender need to "deal" in loans to be subject to SE tax?  No.

The second CPA in OP's first post is more correct that the first.  Assuming these were their complete, blanket answers and nothing is getting lost in translation, which might be a big assumption.

It's really not a difficult concept.

Sometimes, interest is not subject to SE tax.  Sometimes it is.  Just like sometimes interest is subject to NIIT, sometimes it isn't.

If your activities regarding the lending rise to the level of a trade or business, you have ordinary income subject to SE taxes on your hand.  The bright side is that you are able to deduct all ordinary and necessary expenses (IRC Sec 162) including home office, and that you are not subject to NIIT.  The downside is SE tax.

If it is merely an investment in nature, and does not rise to the level of a trade or business, it is ordinary, portfolio income.  The downside is NIIT and inability to deduct investment expenses, other than investment interest expense, as investment expenses are miscellaneous 2% itemized expenses, which are disallowed, at the federal level, under the TCJA until the 2026 tax year.

What a "trade or business" is, is based on case precedence and other authoritative guidance.  Because of the room for interpretation, I recommend you work with your tax advisor to figure out that part.