What You Need to Know about Hard Money Loans and Taxes

It’s tax season again, which means adults all over the country are sitting down, gathering all their documents for the year and trying to find any and all ways to deduct from their annual tax bill.

Homeowners often get a few tax breaks that renters, but how does that work when you haven’t used a traditional lender? If you borrowed from a hard money lender this past year, you may be wondering if anything on your loan is tax deductible.

So what qualifies?

Fortunately, the Internal Revenue Service doesn’t differentiate between traditional mortgage lenders and private lenders, as long as they meet the requirements. Basically, the home or property must be secured by a financial institution that can reclaim the property if you fail to repay the loan. As long as the residence has a kitchen, a bathroom and sleeping quarters, it counts as a home. In this sense, even something like a houseboat can count.

So, whether you are paying a small percentage over thirty years or a slightly higher percentage in interest over twelve months, the interest you pay during the year is considered deductible.

How do I report it?

Reporting mortgage interest from a hard money lender is the same as if you were to report it from a traditional lender. You should receive a special document called a 1098 that states your loan amount, the interest paid in the past twelve months, and what is left outstanding on your loan. On your tax return, there should be a space to report this information, and you can see if it saves you a few dollars on your tax bill.

If the lender fails to send you this document in a timely manner, they can face up to a $50 fine for each one not sent. If you need to file your taxes but don’t have an official statement, you can write in the interest paid, the lender’s name and address, and their tax identification number to identify the lender.

Do I have to itemize?

Yes. To claim interest paid on a mortgage as a deduction, it’s important to itemize your deductions using the IRS Form 1040 with a Schedule A. If your form 1098 has an amortization schedule, add the amounts in the “Interest” column to get the total amount paid for the year. If it doesn’t simply look up a free amortization calculator online to help you figure it out. Most forms will have the interest paid calculated for you already.