If an individual makes an unsecured loan to another individual (or LLC) for business purposes (real estate investment), what is the tax rate that the lender will have to pay on the interest income that he/she receives?
My understanding is that it’s 15% currently. Is that correct? Are there any exceptions/restrictions to consider?
I’ll be speaking with my accountant this week, but wanted to get your input.
Thanks.
The IRS publishes minimum rates to avoid imputed interest. I think it is closer to 6% than 15.
Interest income you receive is taxed as ordinary income at your marginal tax rate. If you are in the 28% tax bracket, then your interest income will be taxed at 28%.
Thanks.
To clarify my question: I’m asking about the tax that they private lender will have to pay on his/her interest income - not the rate of the actual loan. I am aware of the minimum rates established by the IRS.
So interest income is treated as ordinary income?
Thanks again.
So interest income is treated as ordinary income?
Yes.