Navigating tax responsibilities can be complex, and one common area of confusion is whether private lenders should send Forms 1099-INT to investors and if investors should receive Forms 1098. Let’s break down these processes step by step for clarity.
Part 1: Forms 1098 from Private Lenders to Investors
Forms 1098 from Conventional Mortgage Lenders: Traditional mortgage lenders provide Form 1098, detailing the interest paid on mortgages. This information is crucial for IRS deductions. The IRS cross-references your 1098s with claimed deductions, raising concerns if discrepancies arise.
Private Lenders and Forms 1098: Private lenders are required to send Forms 1098, but only if they meet specific criteria:
The private lender operates as a “trade or business,” distinguishing professional lenders from casual lenders like friends or family members.
The loan is issued to an individual or a disregarded single-member LLC.
The loan is a mortgage secured by real property.
The annual interest paid on the mortgage was $600 or more for the previous year.
The conditions leave some room for interpretation, particularly regarding the “trade or business” clause. Consequently, uncertainty surrounds whether investors will receive a 1098 from their private lender, making it somewhat unpredictable.
Not Receiving a 1098: If investors do not receive a 1098, they can still legally claim the interest paid as a deduction. However, there’s a risk of having to prove this to the IRS. To minimize audit risk, it’s advisable to choose “Other interest” instead of “Mortgage interest” when reporting.
Part 2: Forms 1099-INT from Investors to Private Lenders
Forms 1099-INT Explained: Similar to the interest earned on savings accounts, Form 1099-INT outlines the interest that must be included in taxable income. It notifies the IRS of expected taxes on this income.
Sending Forms 1099-INT as an Investor: Investors should send Form 1099-INT to private lenders if they meet two criteria:
They operate as a “trade or business,” applicable to flippers and landlords.
The annual interest paid on the private loan was $600 or more for the prior year.
Private Lender Reporting: Private lenders must report the interest collected on private loans as taxable income, even without receiving a 1099-INT. Similar to not receiving a 1099-NEC for contract work, reporting income is mandatory.
Final Disclaimer: While there’s more nuance to these rules, and interpretation may vary, filing these forms is a minor hassle. As a general guideline, when in doubt, it’s advisable to send these forms to ensure compliance to your tax pro.
