Note Investing: Passive Income & Taxes

[Alecia Bolton]

In another thread, @Chris Seveny and @Tracy Z. Rewey mentioned that investing for passive income in notes (performing notes/monthly cash flow) isn't great from a tax perspective, and you should use that in a tax deferred vehicle.

Personally, this is exactly my plan.  Grow my performing note portfolio to generate enough passive income to live off of.  In theory, it would be the only income (probably not in reality, as I love notes, but beach living and tiny umbrella drinks is potentially the life for me).

So how does one avoid losing too much of a return to the tax man?  Or do you just suck it up knowing that you're doing it for the cash flow and just add that to your calculation of how much passive income you need.

Interested in hearing people's strategies.  I'm not an accountant, but maybe buying everything through an s-corp and taking a salary?

[Chris Seveney]

@April Banda

Great question, not a CPA or accountant but in my business I know my book keeper keeps rentals different from notes and I think they are treated different for tax purposes on how / what form they go on.

Overall I recommend a diverse portfolio to include rentals and notes. As mentioned notes have a lot more benefit in a SDIRA versus rental since you do not get the advantages of depreciation. Like others mentioned, this is not a one size fits all and each persons situation is vastly different which is why its great to hear what people say but truth is do not take this advice and run with it. Review it with your CPA and ask the questions is best course of action as they know your situation better than someone posting on BP