Hard money loans are a great way to get alternative financing, compared to a bank loan or a home equity line of credit. A hard money loan uses your property as equity, allowing you to borrow about 75-80% of the LTV (Loan-to-value ratio) of your home for a short-term, 6-12 month loan.
If you’re a property owner thinking about hard money lending, there are a few things you should know about hard money loans and taxes. Learn more, and protect your capital with this guide from Lionshare.
Interest On A Hard Money Loan Is Deductible
A hard money loan does allow you to deduct interest in your taxes. For example, if you borrow $100,000 to cover the cost of renovating your house before selling it, and you pay an 8% yearly APR, the total cost of the loan is $108,000.
You can deduct the full interest amount ($8,000) from your taxes on that tax year. However, you cannot deduct the principal – the $100,000. Only the interest is tax deductible.
This can help you maximize your capital, and ensure that you get the biggest possible deductions – which is very important if you expect capital gains on a property.
To Deduct Interest, You Need To Prove The Debtor-Creditor Relationship
For a business loan to be tax-deductible, it must fit 3 criteria:
- You must be legally liable for the debt – with paperwork on file of a creditor giving notice that they have interest in your personal property.
- There must be proof that you and the lender both intend the debt to be paid – payment receipts, depositing of monies by the lender, etc.
- You have a “true” debtor-creditor relationship. When getting a hard money loan, you must get paperwork that outlines and details the precise nature of your relationship.
You’ll Likely Need To Provide A 1099 To Your Lender – Or Be Penalized
A 1099 form allows you to report all of the interest that you paid on a home loan or a hard money loan. The person to whom the 1099 is sent is responsible for reporting this income – so if you send a 1099 to your lender, it is their responsibility to file for the interest that they gained from your loan.
If you fail to send in a 1099, you could be penalized. If it’s 30 days late, the penalty is $15 per information return – but the penalty will increase if you continue to fail to send the required documentation. Procrastination will only make things worse, so make sure to send all required documents – and consult your CPA with further questions.
Maximize Gains And Minimize Taxes And Penalties With This Advice
With the right understanding of hard money loans, it’s easy to maximize your tax breaks and minimize the cost of your loan. Need private financing for commercial property development or renovation? Contact Lionshare right away. With great customer service and more than four decades of experience, we’re here to help.