Kamis, 02 Juni 2011

Tax Statements and Private Money Lenders

By Karen Rittenhouse

It's tax time... Have you borrowed hard money? Have you lent private money? When lending and borrowing, are you mailing and/or receiving 1098′s or 1099′s? Do you know how to use them?
At a recent Triad Mastermind Meeting, there were questions concerning who gets 1099 income and 1098 statements. We asked our CPA and here is some of what was shared:
You should provide 1099 INTs to whomever interest is paid. Whether a 1099 is sent or received, the person or entity who receives the interest is responsible for reporting the interest income.
You have proof that you are paying the interest even if the recipient does not send you confirmation of the payment. If the recipient does not report it, then the recipient would face fines and penalties for unreported income. There is a $50 penalty for forms not filed.
The 1098 is filed by the interest recipient of mortgage interest. You should send 1098s to any owner financed properties on which you received interest. If private money is linked as a mortgage on a specific property, then the interest recipient should send to you a 1098. There are penalties if the IRS pursues and discovers that 1098s were not filed.
By the way, the IRS has made a decision to target real estate professionals for audit. Why has the IRS targeted real estate professionals at this time? According to their own December 20, 2010 report:
Actions are needed in the identification, selection, and examination of individual tax returns with rental real estate activity.
In August 2008, the Government Accountability Office stated that "at least 53 percent of individual taxpayers with rental real estate activity for Tax Year 2001 misreported their rental real estate activity, resulting in an estimated $12.4 billion of net misreported income."
As always, check with your CPA for all tax questions and discuss with your closing attorney so these issues can be handled correctly from the beginning of all transactions.
What does your CPA say?
**UPDATE** You should be aware that there are penalties for failure to send a required 1099 (Misc, Div, Int, etc.). The good news is that the penalty is based on how late you're filing. If it's just 30 days late, the penalty is only $15 per information return. It increases to $30 if you file by August 1, and goes to $50 if you file after that. So, if you're late, procrastination will only make it worse.
You may be able to avoid the penalties completely if you can show that failure to comply was due to reasonable cause. But that's not as easy to do as it sounds. Failure to file a W-2 results in a $50 penalty per W-2. Failure to file the W-3 summary of the W-2s starts out at $15.

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