Is the Interest on a Hard Money Loan Tax Deductible?

Is the Interest on a Hard Money Loan Tax Deductible?

We assume that most people looking to borrow from Actium Partners work with their accountants or tax preparers on strategies to reduce their tax liabilities. But if you are new to the whole hard money game, you might not know how a loan from us would affect your tax position. For example, is the interest on a hard money loan tax-deductible?

We are hard money experts, not tax professionals. As such, we wouldn’t even dream of giving you or anyone else qualified tax advice. But we can report what the Small Business Administration says about interest paid on business loans.

As a general rule, the interest paid on any business loans that meet the government’s threshold for interest amount can be claimed as a business expense. Furthermore, loans secured by property – which is the very definition of a hard money loan – are eligible for claiming interest as a business expense. Note that the SBA lays out five rules by which borrowers can determine if interest paid on loans is deductible.

1. Loans Must Be Used for Business Purposes

In order for interest on a hard money loan to be deductible, the loan would have to be used for business purposes. Interest on personal loans (with the exception of mortgages and student loans) is not deductible. Fortunately, the government takes a broad view of business expenses.

A hard money loan to expand your business would likely qualify for an interest claim. If you are a real estate investor and your investments are set up as a business enterprise, you would probably be good to go. But if your operations were structured as investments for tax purposes, the amount of interest you could deduct could be limited.

2. The Gross Receipts Test

Businesses with average, 3-year gross receipts in excess of $26 million (as of 2019) are limited in the amount of interest they can claim on their taxes. Businesses with lower gross receipts are not subject to limits. This is something to speak with your accountant or tax preparer about.

3. Being a Guarantor Doesn’t Count

Though guarantors are not a big part of the hard money business, it is still important to note that guarantors cannot claim interest payments on their taxes unless the borrower defaults and the guarantor is left paying the bill. In short, simply being a guarantor does not allow you to claim interest. After all, you are not paying interest as long as the borrower stays current on the loan.

4. Accounting for Implied Interest

The fourth rule mentioned by the SBA also isn’t something we see in the hard money industry. Nonetheless, it is an interesting rule to note. It involves what is known as ‘implied interest’. If a loan is made interest-free or at a rate below the IRS threshold, the lender must report implied interest as income while the borrower can claim that same amount.

5. Points and Fees Can’t Be Claimed in the Same Year

Finally, the government views points and other loan fees as prepaid interest. These cannot be claimed on your taxes in the same year they are paid. Instead, you have to wait one year. In most cases, prepaid interest is claimed over the life of the loan at a specific rate each year.

We are guessing you may have more questions about hard money loans and interest deductibility. We advise that you discuss the topic with your accountant or tax preparer. We can give you all the advice in the world on hard money loans; tax professionals are the ones to go to for tax advice.

Disclaimer: We are not tax experts. Please consult with your tax advisor for further information on deducting your loan in your taxes.