138 How Is Interest Income Taxed If I Lend My Personal Cash?
In today’s episode of Passive Wealth Show, Bill Fairman and Wendy Sweet of Carolina Capital Management will answer the “ Ugly Question” of the day:
How Is Interest Income Taxed If I Lend My Personal Cash??
0:01 – Teaser – “ Have you ever wondered as a lender how you are going to get taxed on your income?”
0:33 – Introduction
2:42 – Breaking News
6:12 – Today’s “Ugly Question” – How Is Interest Income Taxed If I Lend My Personal Cash?
17:15 – Next show: “ Inflation, Deflation and, Stagnation!” – https://youtu.be/h19bGmRKlkE
Carolina Capital is a hard money lender serving the needs of the “Real Estate Investor” and the “Small Builder” borrower who is striving to build wealth and generate income for themselves and their families. We offer “hard money rehab loans” and “Ground-up Construction Loans” for investors only in NC, SC, GA, VA, and TN (some areas of FL, as well).
As part of our business practices, we also serve as consultants for investors guiding them to network with other investors and educating them in locating and structuring transactions. Rarely, if ever, will you find a hard money lender willing to invest in your success like Carolina Capital Management.
Bill Fairman (00:01):
Hi folks. Welcome to our show. Have you ever wondered as a lender, how you’re going to get taxed on your income from the lending since we’re close to tax time?
Wendy Sweet (00:13):
Turn my ringer off.
Bill Fairman (00:14):
Although the yeah. Oh, by the way, those of you in the audience turn your phones off, please.
Wendy Sweet (00:20):
Bill Fairman (00:20):
We’ll find out how you’re going to be taxed right after this.
Wendy Sweet (00:24):
Bill Fairman (00:34):
Yeah. when you just pointed out to me, if you’re watching us from your phone,
Wendy Sweet (00:39):
Don’t turn it off.
Bill Fairman (00:43):
So thanks for joining us on The Passive Wealth Show. We are Carolina Capital Management. We are lenders in the Southeast, and we specialize in real estate investment loans. So if you’re interested in borrowing money, go to our website, www.CarolinaHardMoney.com. Click on the apply now tab, if you are a passive investor, looking for passive returns, click on the accredited investor tab, don’t forget to like share, subscribe, hit the bell all that good stuff. We also have a comment section on either the right side of the screen or underneath, depending on the platform you’re viewing us from. That cover everything?
Wendy Sweet (01:23):
Bill Fairman (01:25):
Wendy Sweet (01:25):
We hate that Jonathan isn’t with us today. He is in the process of eliminating the opportunity for him to have children.
Bill Fairman (01:31):
HMDA or HIPAA.
Wendy Sweet (01:37):
Hip the HMDA?
Bill Fairman (01:37):
HIPAA privacy, Don’t say.
Wendy Sweet (01:38):
It’s Mortgage stuff. No, I didn’t say exactly what he’s doing, still not sure they can read into that.
Bill Fairman (01:44):
Okay. I’ll move along then. How’s your day going?
Wendy Sweet (01:48):
So far, it’s been busy, which is normal. Did you get to read all the good stuff that’s coming out? Well, here’s, what’s funny. Today is April 15th, right? Used to be April 15th, meant something, right?
Bill Fairman (02:03):
Wendy Sweet (02:03):
Used to be that you really had to do your taxes by April 15th, but really for the past two years, they’ve just pushed it out there for us.
Bill Fairman (02:11):
Well, part of the reason is the IRS is way behind anyway.
Wendy Sweet (02:18):
Crazy behind, Yeah.
Bill Fairman (02:21):
It’s funny. The, we have a CPA firm that is in the building below us, and they’ve been working double time for months.
Wendy Sweet (02:31):
They have, exactly.
Bill Fairman (02:31):
And they will probably be working double time for a few more months to do so. It doesn’t really matter, but they.
Wendy Sweet (02:37):
That’s right. No more.
Bill Fairman (02:39):
So yeah, let’s talk about some breaking news before we get to.
Wendy Sweet (02:45):
Bill Fairman (02:45):
Bill Fairman (02:55):
Wow. That’s some interesting.
Wendy Sweet (03:00):
That was pretty, well I always like our new stuff on the scene, what our graphics are going to be.
Bill Fairman (03:05):
So let’s just get to the unemployment numbers. They actually first time claims went really low, they’re expecting 703, they came in at 587. So that’s good news
Wendy Sweet (03:19):
Except for last week then, right? Which was really bad.
Bill Fairman (03:22):
They continue and claims came in a little bit higher than they expected? I can’t remember what it was, but you know, last week it was like 7 million, so it’s in that range still. Economic numbers came out this morning though. So retail sales actually beat expectations back quite a bit. It was 9.8% over what it was from February.
Wendy Sweet (03:51):
Now, is that different from going into a big box store or buying it online? Do they fill that in the same category.
Bill Fairman (03:58):
It’s all the same, retail sales, so it can be online, It could be in-person.
Wendy Sweet (04:03):
I got all the texts. But I got up the stimulus money. So everybody’s out here buying stuff. I could get a TV at Walmart.
Bill Fairman (04:09):
It is really. There’s a few things happening. Yes. That has something to do with it,
Wendy Sweet (04:13):
Bill Fairman (04:13):
People getting that extra money. A lot of people are investing that those stimulus checks in the stock market,
Wendy Sweet (04:19):
The smart people are.
Bill Fairman (04:19):
The reason why, one of the reasons why the market keeps moving up, well, one of them is you can’t really make any money in bonds. It’s like, you’re going to have to put it in equities. But you know, the numbers were well below expectations in February, but you know, we had that really cold snap in February. So some of those March numbers are because people weren’t getting out, some of the March numbers are also because of the cold, they’re having to go out and buy a bunch of stuff to fix all the broken water pipes from places that weren’t used to it getting cold.
Wendy Sweet (04:58):
Yeah. Replacing sheet rock and flooring and all kinds of stuff. Yeah.
Bill Fairman (05:04):
Here, we’re going to talk about this in our next segment, but the stock market is absolutely booming right now. And it’s kind of a false narrative and I’m going to tease it a little bit. We’re going to talk about this in our next segment, but.
Wendy Sweet (05:21):
Should you stay or should you go?
Bill Fairman (05:23):
Yeah. Companies are profiting. Cashflow is great, but is that still a good thing? Right.
Wendy Sweet (05:33):
Good question. You know, what’s Warren Buffet doing?
Bill Fairman (05:39):
I don’t know. He doesn’t usually tell me.
Bill Fairman (05:41):
Bill Fairman (05:44):
Listen, I keep up with a lot of it, but I’m not a huge student of what’s breaking all the time. I’m more of a, and Wendy’s the same way. We’re more long-term thinkers,
Wendy Sweet (05:58):
Yeah, we’re thinking about what Jimmy Buffett’s doing? What’s going on down in the keys.
Bill Fairman (06:07):
Warmth and manatees.
Wendy Sweet (06:07):
That’s right, good fishing.
Bill Fairman (06:13):
Yeah. Let’s go ahead and get to our ugly question.
Wendy Sweet (06:17):
The ugly question.
Bill Fairman (06:32):
So our question for the day is how is interest income taxed? If I lend from my personal cash? Well, the simple answer is just like any other income would.
Wendy Sweet (06:47):
All right. Shows over
Bill Fairman (06:50):
Little game. It is just ordinary income because you’re receiving interest payments monthly or quarterly. Or you’re, you know what, now that I think about this it depends on how your note is written. If you are charging interest, it’s still going to be taxed the same way, it’s just going to be taxed over different periods of time. So if it’s taxed, if you receive it quarterly, monthly biannually, you’re going to pay it that year, the year that you receive it. So if you do a note where there’s no interest until, or there’s no payments until the maturity date,
Wendy Sweet (07:39):
That’s a good point.
Bill Fairman (07:39):
Then you would pay that when you receive it.
Wendy Sweet (07:42):
When it’s paid off.
Bill Fairman (07:43):
So if you have a five-year note and it’s just accruing over five years, then in the fifth year, it might as well be a capital gain. However, it won’t be taxed as a capital gain. It’ll be taxed as ordinary income. It’ll just put you in a much higher income bracket. It’s like getting a bonus after five years.
Wendy Sweet (08:01):
Right. So, but if you’re lending that’s, if you’re lending with your own money, if you’re lending through self directed IRAs or 401ks, things like that.
Bill Fairman (08:12):
Yeah. It’s still taxed. It’s just deferred.
Bill Fairman (08:14):
Yeah. Well, unless it’s a Roth.
Bill Fairman (08:17):
Until you receive it.
Wendy Sweet (08:17):
Unless it’s a Roth
Bill Fairman (08:19):
Yeah, but you paid tax on that money,
Wendy Sweet (08:22):
But that’s when you put it in it. So not really. I think when you, if you’re earning interest off of money that you have loaned out through your self-directed IRA, that money coming in is not taxable.
Bill Fairman (08:36):
No, it’s not.
Wendy Sweet (08:37):
Bill Fairman (08:37):
The money that you’re paying tax on. It’s the money, if it’s a traditional IRA is as you’re receiving the money, that’s when it’s being taxed, you’re not receiving the money. If you’re lending it out of your IRA, your IRA is receiving the money.
Wendy Sweet (08:52):
Bill Fairman (08:52):
When you receive the money as a distribution.
Wendy Sweet (08:54):
Is when you be taxed.
Bill Fairman (08:54):
From your custodian.
Wendy Sweet (08:57):
Bill Fairman (08:58):
That’s when it’s going to be taxed. If it’s a Roth, you paid taxes on the money before you ever.
Wendy Sweet (09:05):
But you still don’t pay taxes on the money that you earn.
Bill Fairman (09:08):
No, you never pay tax on the money.
Wendy Sweet (09:09):
That the interest earns.
Wendy Sweet (09:14):
And by the way, you can learn so much more about all of this in, at Quest Con, which starts tomorrow.
Bill Fairman (09:23):
Do me a favor. And if you don’t mind throw that link up, we still have a, there it is right there on the bottom of the screen. And it’s in the comment section as well. There’s it starts tomorrow, but there’s 30% off if you use that link. And Wendy and I will both be on different panels throughout the weekend. Looking forward to that. It’s this year, it’s all about lending.
Wendy Sweet (09:52):
Yeah. which will be very interesting.
Bill Fairman (09:54):
Yeah. So they have some great folks on their Fuquan Bilal one of our friends is on there.
Wendy Sweet (10:02):
Eddie Gant will be on there Eddie Speed.
Bill Fairman (10:02):
Wendy Sweet (10:02):
Martha’s going to be on there.
Bill Fairman (10:03):
Wendy Sweet (10:06):
Yeah. And Fred.
Bill Fairman (10:07):
Wendy Sweet (10:07):
Yeah. They’re so knowledgeable. They’re gonna really be in depth talking about notes and creating notes, and.
Bill Fairman (10:15):
I know there’s others that I’m forgetting and I apologize.
Wendy Sweet (10:19):
I’ll look through it too. I’m trying to remember.
Bill Fairman (10:22):
Sometimes when we get old, we don’t have it written right in front of us. So if you’re, let’s go a little bit further into taxes on lending. If you’re in a fund, how do you get taxed based on the income you receive from a lending fund.
Wendy Sweet (10:45):
Are you asking me that question? Are you setting me up?
Bill Fairman (10:48):
No, I’m asking.
Wendy Sweet (10:48):
I don’t, answer it.
Bill Fairman (10:51):
Answer it the same way, it would be if it was as your own money.
Wendy Sweet (10:56):
Bill Fairman (10:56):
So there are no tax benefits to being a lender. The benefits are from not having the responsibility of property ownership,
Wendy Sweet (11:09):
Bill Fairman (11:10):
You’re typically in the deal for much less than you would, if you’re owning it, you do not get the advantage of a appreciation over time.
Wendy Sweet (11:23):
Your risk is lower.
Bill Fairman (11:23):
And you don’t get the advantage of depreciation that you can write off. But at the same time, we like to call it a return on effort. The effort is much lower when you’re not having to deal with taxes tenants, toilets, trash.
Wendy Sweet (11:44):
Bill Fairman (11:44):
All the aggravation that’s involved. And yes, you’re going to have much more of a cushion between the market value of the property and what you’re in the property for when you’re the property owner you’re in the property for could be for what it’s worth. But you still have an equity piece between.
Wendy Sweet (12:05):
Bill Fairman (12:05):
Hopefully your margin is a little bit higher too. So you’re not overleveraged. So boy, that was an easy question.
Wendy Sweet (12:16):
Well, you know, too, when we’re talking about lending you know, the taxes and you know what you’re paying on taxes, but, you know, we mentioned the IRA piece. It’s really important to understand too. You can lend out of your IRA and you could also purchase properties out of your IRA. And it’s really in most cases you’re better off lending out of your IRA and owning properties, you know, out of cash type.
Bill Fairman (12:49):
Yeah. Couple of things, when you’re in an IRA and you own assets in the IRA at the end of every year, you have to tell the IRS how much that asset is worth. So if you’re in a fund, it’s fairly simple, the fund manager, along with copies of the statements as backup documentation we’ll fill these forms out. If you own these assets know in the IRA itself, not through a fund, you typically have to go out and hire an appraiser at the end of every year to tell you what the value is. So that’s an additional expense and a real pain to do that and type of thing, if you’re lending and you’re in a note, you just show him a copy of the note.
Wendy Sweet (13:44):
Bill Fairman (13:44):
There’s your documentation. There’s no appraisal needed, so that part’s a whole lot easier.
Wendy Sweet (13:49):
Bill Fairman (13:49):
Now, the benefit of owning property. And I give you one right now, if you decide that you want your, for your retirement forever home to be in a certain place, you can go ahead and buy it as a long-term rental, have it inside of your IRA, renting it. So, you know, for the next 10, 15, 20 years, however long you have it. And then when it’s time for you to move down there, cause you’re not supposed to occupy that you say,
Wendy Sweet (14:20):
Uh-huh. Right, down there, he’s already got his Florida trip planned.
Bill Fairman (14:26):
You take that home directly as a distribution. And in the meantime, you can get it fixed up, however you want it and then take it as a distribution.
Wendy Sweet (14:36):
Yeah. That’s really interesting.
Bill Fairman (14:39):
Now, keep in mind if this is not in a Roth the reason that tax deferred is usually better is because you’re assuming you’re not going to be making much money.
Bill Fairman (14:51):
When you can take now, yeah.
Bill Fairman (14:52):
In retirement as you are in your active work time.
Wendy Sweet (14:58):
Bill Fairman (14:58):
So you’re, you want to defer your taxes because you’re going to be in a lower tax bracket, assuming you don’t have this large house, you was just taking as a distribution.
Wendy Sweet (15:07):
Bill Fairman (15:12):
So your tax bracket will probably go up when you take that distribution. Cause it’s a pretty large value.
Wendy Sweet (15:19):
Bill Fairman (15:20):
But then you won’t have it again after that. So it’s okay.
Wendy Sweet (15:24):
Bill Fairman (15:24):
But I mean, you can still buy a house at a decent price and keep it, have it paid for and make money on it and then turn it into your retirement note.
Wendy Sweet (15:32):
Right? The point of everything is, is don’t not do a deal or do lending because you’re worried about the taxes.
Bill Fairman (15:43):
Wendy Sweet (15:43):
There’s, it’s you know, we have to laugh at our mom who we love mom. She complains about the taxes that she has to pay on the interest that she’s earning.
Bill Fairman (15:55):
You know, bottom line is we’re paying taxes, you’re making money.
Wendy Sweet (15:58):
We have to remind her of that.
Bill Fairman (16:00):
They don’t charge you taxes for not making anything.
Wendy Sweet (16:04):
Bill Fairman (16:04):
We hate that we have to give it up.
Wendy Sweet (16:07):
Bill Fairman (16:07):
You’re still, you’re making money if you’re, if you’re paying that.
Wendy Sweet (16:10):
Bill Fairman (16:11):
And now there’s some things to think about right now. If you have a bunch of assets, is it time to sell now before the, the taxes go up because we are assuming taxes are going to be.
Wendy Sweet (16:27):
Well I’m here and I don’t like to. yeah.
Bill Fairman (16:29):
So do you go ahead and especially now, if they want to go up on the capital gains, you go ahead and sell now.
Wendy Sweet (16:36):
Well, it’s already 2021 will capital gains go up in 2021? or is it going to happen in 22, who knows?
Bill Fairman (16:44):
Yeah. Well, they can’t make any law retroactive, but you can certainly think about.
Wendy Sweet (16:54):
He might be able to do an executive order to change that who knows?
Bill Fairman (16:56):
He could try.
Wendy Sweet (16:56):
Bill Fairman (17:01):
But anyway, Something to think about.
Wendy Sweet (17:03):
Bill Fairman (17:03):
Do you liquidate some of your assets right now and put it into cash and then become more of a lender than an asset holder,
Wendy Sweet (17:09):
Especially now that we’re, I think we’re at the top of the market, but it just keeps getting better.
Bill Fairman (17:16):
Oh, so, Oh, there’s our show for next.
Wendy Sweet (17:17):
Bill Fairman (17:17):
Coming up, inflation, deflation or stagnation. We’re going to count on you guys to type in and tell us what all this stuff means.
Wendy Sweet (17:31):
It’ll be a short show.
Bill Fairman (17:33):
So again, don’t forget about quest con. You’re going to learn tons. You’re not just learning, but it’s also about the networking.
Wendy Sweet (17:45):
That’s exactly right.
Bill Fairman (17:45):
If you want to know where to find money for your projects or where to learn and invest alongside of other people, you need to do it with Quest Con because you’re going to meet tons of people that are going to help you out.
Wendy Sweet (18:01):
And the thing is, is you will be able to network because, you know, if you are investor looking to raise capital to be able to invest, you know, you should have a multitude of private lenders and this’ll be a great opportunity to meet other people that will lend you money. And if you’re looking to lend again, you’ve got a lot of investors that are looking for lenders. So
Bill Fairman (18:22):
I don’t want to speak out of term, but you know, we were at freedom founders this past week. And Quest loan said that there is something like $347 million in their accounts.
Wendy Sweet (18:36):
In theirs, That just theirs.
Bill Fairman (18:37):
Bill Fairman (18:39):
And think about all the other,
Wendy Sweet (18:39):
Yeah. There are other really good companies.
Bill Fairman (18:39):
Folks, looking to invest in something, there’s one of the things as you’re investing and you get in and out of an investment, new things get paid off and, or you’re just afraid to pull the trigger. There’s money sitting there ready to invest. So if you’re somebody that is working on projects you need to find some private investors there.
Wendy Sweet (19:03):
Bill Fairman (19:05):
So Wednesday was windy. Make sure that you sign up on that link for count. The Calendly link. Wendy is usually booked out several weeks if not months in advance.
Wendy Sweet (19:18):
Yeah we’re booking into June right now. So, but it’s worth it. We, I get so much out of it and I love being able to connect people with other, other people as well. So
Bill Fairman (19:28):
Yeah, I get a lot out of it too. I’m across the room and every time I say something out the door when he’s Like Shut up, Turn off the Zoom call.
Wendy Sweet (19:34):
I never say that. I just do one of these.
Bill Fairman (19:43):
So thank you guys so much. I know we were very exciting.
Wendy Sweet (19:48):
I was, he isn’t.
Bill Fairman (19:53):
I’m pretty dry today. I’m just worn out from being gone. Most of last week started and the pollen good grief, the pollen is killing me.
Bill Fairman (20:02):
But that means it’s spring.
Bill Fairman (20:04):
Yeah. Thank you so much for joining us on The Passive Wealth Show. The Ugly Question Segment. We are Carolina Capital Management. We are lenders in the Southeast and we specialize in investment loans. So if you are a borrower interested in borrowing money, www.CarolinaHardMoney.com click on the apply. Now tab, if you’re a passive investor, looking for passive returns, click on the accredited investor tab, don’t forget to like share, subscribe and hit the bell. And we’re looking forward to seeing you in a few minutes on our next segment. You want to put that link up as well, if you don’t mind. There’s, there’s another link to catch us on our next show. And we’re going to be talking about inflation, deflation stagnation. What do you think the market is going to be doing here in the next year?
Wendy Sweet (20:58):
Yeah, but we’re going to be more excited about that. I’m going to give him some Sudafed, get him going and we’ll be good.
Bill Fairman (21:05):
More caffeine please.
Wendy Sweet (21:08):