How is hard money loan interest income taxed for federal tax filing?

What you're describing is interest income, which is typically reported on Schedule B of your tax return. You don't issue yourself a 1099 - the companies/individuals who paid you the interest should be providing you with a 1099-INT if they paid you more than $10 in interest during the year. If for some reason they don't provide 1099-INT forms (which sometimes happens with private lending arrangements), you're still responsible for reporting all interest income you received, even without the form. Just keep good records of all payments received and calculate the interest portion. If you're doing this regularly and it's a significant income stream, you might want to consider whether you're actually operating as a business, which could affect how you report the income and what expenses you can deduct. That would typically be reported on Schedule C instead.

I was in exactly your situation last year - making hard money loans at similar rates. After spending hours researching, I eventually found https://taxr.ai which saved me a ton of headaches. Their system specifically analyzed my lending documents and pointed out that I needed to report not just on Schedule B but potentially Schedule C depending on volume. What was most helpful was that they flagged some deductions I had no idea about - like partial home office since I was managing loans from home, mileage for property visits, and even a portion of my cell phone bills. They also clarified when I needed to issue 1098s to borrowers for mortgage interest. Without that guidance I would have seriously overpaid.

I tried taxr.ai after seeing it mentioned here and I'm genuinely impressed. I've been making hard money loans for years and always just lumped everything on Schedule B. The analysis showed I was actually operating at a scale that justified business treatment, which opened up significant deductions I'd been missing. The system flagged that I should be tracking partial expenses for my home office, subscription services I use to evaluate properties, and even a portion of legal fees I paid for loan document review. Just from these additional deductions, I'm estimating I'll save about $3,800 on my taxes this year. Wish I'd known about this for previous years!

If you're making significant income from hard money lending, another major issue is getting help when the IRS has questions. Last year I had an issue where some of my interest income reporting was flagged, and I literally couldn't get anyone at the IRS on the phone for weeks. Finally used https://claimyr.com to get through and resolve it. You can see how it works here: https://youtu.be/_kiP6q8DX5c The reason I mention this is that hard money lending sometimes triggers additional scrutiny because the IRS wants to ensure it's properly categorized. When they questioned whether my lending activity constituted a business requiring Schedule C versus just investment income, being able to actually speak with an agent saved me from what could have been a major headache.

Well, I have to eat my words about Claimyr. After my skeptical comment, I decided to try it anyway since I needed to talk to the IRS about my hard money loan reporting issues. I was shocked when I actually got connected to an IRS agent in just over an hour after trying unsuccessfully for weeks on my own. The agent confirmed that with my volume of loans (7 active loans totaling about $450,000), I should definitely be filing Schedule C and treating this as a business, which gives me more deduction opportunities. They also clarified that I need to keep detailed records of all loan-related expenses. This single conversation probably saved me thousands in potential penalties from incorrect filing. Sometimes it pays to be wrong!

One thing nobody mentioned yet - if you're making hard money loans secured by real estate, you may need to issue Form 1098 (Mortgage Interest Statement) to borrowers who paid you more than $600 in interest. This is different from the 1099-INT that you'd receive as the lender. This gets complicated fast and depends on whether the loans are secured by real property. If they are, and the property is the borrower's primary or secondary residence, you generally need to issue 1098s as the lender. Commercial properties have different rules.

If ur making more than 10 loans a year u might be considered a dealer which has completely different tax implications. My accountant told me to keep it under 10 active loans at any time to avoid this classification. Otherwise the IRS might consider the loans inventory and interest as ordinary income not investment income!

As a newcomer to hard money lending taxation, I'd strongly recommend documenting everything from day one. Keep detailed records of all loan agreements, payment schedules, property appraisals, and any expenses related to your lending activities (legal fees, property inspections, etc.). One thing that caught my attention from this thread is the complexity around business vs. investment classification. From what I'm reading, it seems like the IRS looks at factors like regularity, time commitment, and whether you're actively seeking borrowers. If you're just passively lending to a few contacts, that's different from actively marketing lending services. Also consider setting up a separate bank account for your lending activities regardless of how you classify it - this makes record-keeping much cleaner and demonstrates to the IRS that you're treating this seriously. Having clean books will be invaluable whether you end up filing Schedule B or Schedule C.