How Private Lenders Handle Taxes – 1098s, 1099s & More

Managing Taxes in Private and Hard Money Lending

Right now, it is mid-March 2025. I really hope that you’ve already filed your taxes for the 2024 tax year. However, I briefly wanted to discuss how we handle all of the different taxes and documents associated with a private and hard money lending company. There are four key documents that you should keep track of, or at least be aware of. The first is the 1098, which you are probably already familiar with. This document is given to borrowers, showing how much interest they paid on a particular loan. It’s similar to the 1098 you receive from your bank on your primary residence, which lists the taxes and interest paid over the year. You can typically write off the interest amount on your taxes.

The other important documents are 1099s. There are different versions of 1099s, and they are critical for tracking various financial interactions. The 1099-INT is issued to your capital investors, showing how much interest they earned over the course of the year. Then there’s the 1099-NEC, which stands for non-employee compensation. This one is for individuals or companies that aren’t employees but still received income, like referral partners or service providers. Lastly, the 1099-MISC is used for expenses like legal fees or any other specific areas that don’t fall under the other categories.

While there are other versions of the 1099—like the 1099-DIV, which covers dividend income—this is outside the scope of this discussion. If you have dividend-paying stocks, you would receive a 1099-DIV, but for the purposes of lending, we mainly deal with the 1098, 1099-INT, 1099-NEC, and 1099-MISC.

The Obligations of a Private Lender

As a private lender, you have the legal obligation to issue 1098s and 1099s. I know it’s not the most exciting task, but it is essential. If you are receiving or paying interest, you don’t have a choice—you are required by the IRS to provide these documents. As a lender, it’s your responsibility to ensure that these forms are filled out correctly and filed on time. The deadline for sending these forms is January 31st, one month after the previous tax year. For example, for the 2024 tax year, you would need to send the forms to the respective parties by January 31st, 2025.

In my personal opinion, if you are a small lender with just a handful of documents, like five or six, I recommend letting your CPA handle it. They will charge a fee, of course, but it’s worth the time and effort they save you. While I’m not sure about the exact cost, you might pay around $100, possibly even less per document. Simply provide your CPA with all the necessary numbers and information, and let them handle the rest.

If you have more documents to process, especially if you’re scaling up, I strongly suggest using a loan servicing software that can handle everything for you. This way, you won’t have to worry about it. We use Lendr, which tracks all the 1099s and 1098s, both the interest accrued and paid out. It simplifies the entire process.

Using Loan Servicing Software

To effectively manage taxes, especially if you are a mid to large private lender, a loan servicing platform like Lendr is an absolute necessity. A good servicing platform should be able to generate the required tax documents and track all relevant numbers for you. If your platform can’t do this, it might be time to explore alternatives.

Another crucial element in managing taxes is ensuring that the information you track is accurate. I always say, “garbage in, garbage out.” If you input poor data, you’ll get poor results. It’s vital to keep track of accurate EINs, social security numbers, and tax ID numbers. This way, when it’s time to generate the tax forms, everything is already in place. We’ve experienced issues in the past when we had incomplete documentation or were missing certain social security numbers for investors or borrowers. When that happens, you’ll need to chase down the information, which is both unprofessional and inconvenient.

A significant advantage of using Lendr is that, during the onboarding process for a borrower or investor, they must input their social security number, EIN, or tax ID number. They can’t proceed without doing so, which ensures that you have everything you need right from the start. This eliminates the hassle of trying to collect missing information later. Once it’s inputted, it’s done—and you won’t need to follow up with them when generating the end-of-year tax forms.

Filing and Managing Tax Forms

At the end of the year, once you have all your numbers and documents prepared, you can export the information into a CSV file. From there, we personally use track1099.com, which has been an excellent and cost-effective service for us. The main reason we like it is that track1099.com handles the e-filing for us. Many loan servicing platforms will generate the 1099 and 1098 forms, but you still need to e-file them with the IRS. Track1099 does that step for us, which is a huge time-saver.

It’s also quite affordable, typically around $2.65 per form. For a larger volume, the total cost can still be minimal—about $100 for the year. This is significantly cheaper than hiring a CPA to manage it. You simply upload your CSV file, verify the information, pay a small fee, and file. Once that’s done, we take all the generated PDFs and upload them to the respective investor portals and borrower portals inside of Lendr.

We do this because, inevitably, by the deadline—April 15th—some people will reach out, scrambling for their 1099s. While we send them out in January and upload them to their portals right away, people always seem to wait until the last minute. Having the documents in the portal allows you to point them there, avoiding the need to interrupt your day by searching through old emails or documents. The portal is always accessible to borrowers and investors, so they can retrieve their forms independently.

Finally, ensure that all your information is accurate and that tax IDs, social security numbers, and EINs are correctly stored. This way, not only will you be able to access them when needed, but your borrowers and investors can too—without having to go through you.

Final Checks and Spot-Checking Your Numbers

Before finalizing everything, always do a last-minute spot check. It’s crucial to ensure that the numbers you’re reporting are accurate. For instance, if an investor has $100,000 with you, but you report $200,000 in interest income, it’s clearly wrong. This discrepancy would raise red flags and is an easy mistake to avoid with a quick check.

Sending inaccurate numbers to your investors or borrowers is highly unprofessional. If you do, you’ll need to amend the filings, which is a hassle. It’s also important to remember that the use of a third-party service, like Track1099, is worth the small fee. It removes the complexity and provides a smooth, easy solution.

In conclusion, while tax season in private lending isn’t the most exciting topic, it’s an essential part of the business. If you have a more efficient or automated process, I’d love to hear about it. If not, hopefully, this information will help you stay organized and ensure that your tax filings are correct.

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