On 4/27/2017 12:56 PM, Arthur Rubin wrote:
> On Wednesday, April 26, 2017 at 8:16:51 AM UTC-7, Lisa wrote:
>> I have been lending small amounts of money (hard money loans) to borrowers for real estate. I get interest payments. At the end of the year I get a 1099 INT which shows Interest received.
>> The interest payments are in my personal name. I consider this a business.
>>
>> I have a lot of expenses like driving around to see the properties,(some are far away and need to fly to them), staying overnight at hotels, food, gas etc. I need to evaluate each property before loaning money. It is a risk reward evaluation.
>> How do I deduct these expenses against the interest income?
>>
>> Can I insert the Interest as income in a Sch C and deduct the expenses?
>
> I concur with the other posters. You _might_ have a business if
> (1) You can rationally expect to make a profit. (As you say you lend _small_ amounts of money, your expenses to visit a property must be less than your expected revenue from that property; once you get an idea of your acceptance rate, your expenses must be less than expected revenue times the acceptance rate.) "Rationally" and "reasonably" are not part of the regulation, only "honestly", but, since you are asking....
> (2) On each trip, you must spend significantly more time with the properties than on personal sightseeing.
> (3) You must run it as a business.
>
> In general you can deduct "ordinary and necessary" expenses for a business.
>
> "Ordinary" means others in your business do those things, and "necessary" means, that expect a larger net profit from doing those things.
>
> There's also "business v. hobby"; if a hobby, there's no Schedule C, and "ordinary and necessary" expenses can be deducted, as a miscellaneous itemized deduction subject to the 2% limit.
>
> And also "active v. passive"; if a business and passive, you can deduct "ordinary and necessary" expenses up to the amount of income, with carryforward.
>
> Finally, and possibly legitimately, subject to conditions (1) and (2) above, you might be able to deduct them as investment expenses; deductible, up to the amount of income, as a miscellaneous itemized deduction subject to the 2% limit, with carryforward. You would still have a lot of work to document the reasonableness of the expenses. The deduction and carryforward appear to be on a per-property basis; expenses related to a property in which you do not invest are lost.
>
> Seriously, why not use Google Earth to look at properties?
>
> --
> Arthur Rubin, AFSP, CRTP
> Brea, CA
>
I think if this or any other activity qualifies as a business,
deductions would not be "investment expenses" but would be business
deductions, not subject to any limit (other than passive activity loss
limitations, if applicable). And as a business, expenses related to
looking at properties not invested in would also be deductible, as that
is part of the business.
I don't know what "small amounts of money" is, but in my mind higher
amounts of money would be more apt to result in this being a business
activity rather than an investing activity. And with more money at
stake, Google Earth would not suffice for prudent due diligence.
It seems that OP is investing in LP units or something, with the bundler
doing the due diligence, reporting, etc. Sounds like investing activity.