Background for this question is about selling on contract and lending a little money.

I have completed two sales to another investor and am in a third.

All the deals have been where he gives me a down payment and then pays a certain amount monthly until the building is paid off.

No interest is charged. I am making a profit on the final sale. I stop depreciation when we sign the deal. I did this as a way to lessen the tax impact. Spread the joy out as it were. I get CF. He pays taxes and insurance. I am not concerned about him ripping me off, so we can leave that out of the equation.

Was talking to my buddy and he mentioned a law that basically says since I am not charging interest I could be liable for the taxes on a rate that is determined by the gov.

I do not have the link in front of me but I went to it and it seems legit.

So now the same investor has approached me about some smaller hard money loans. He is wanting to buy properties and have me finance them. He will put me as a lien holder on existing properties if I want, on the new property or just a signature note.

I do not want to get audited in the future and be held liable for interest that I didn't collect. I declare all funds I collect. Has anyone else had this happen?

What would be the best way to structure small deals like this? Most likely 50k and less.

I like collecting the money and doing nothing with the properties. But since it is a sale it eventually ends and I lose that CF. If I could get a couple of them in the pipeline that would be great.

Will this end up being something more than RE sales tho?

Maybe this could be a round table discussion for the convention?

I believe your CPA would easily have an answer. Some what related.....

Yes, it's a risky proposition to build it into the sales price. In essence, the way the government sees it, what would have been paid in interest should be taxed at ordinary income rates rather than capital gains rates. It will get expensive if you are caught in an audit.

I'm in the process of selling out slowly, a few each year. I'm being the banker on those. Even though I trust the buyer extensively (he's my son), we are still doing it by the book. Note and deed are prepared and filed. The income is good and it helps spread out the capital gains.

Hard money lending! One of my favorite subjects!

While I still have many rentals, making hard money loans to other investors in my area has been my main activity in the real estate world for about 7 years now, and I talk frequently about it when I am guesting on podcasts.

I cover this subject EXTENSIVELY in my book "Build Real Estate Wealth: Enjoy the Journey of Rental Property Investment," so my answer to you as to where to get information about being a lender (or a borrower) of hard money is to get my book. It is available on the Mr. Landlord website in the bookstore.

Joel I will be there. It is the highlight of my year to go to the Mr. LL conventions.

All others, it seems there is a whole world of options that I had not considered. I am going to look into what you have all said.

When I asked my CPA he didn't seem to know about the tax law that I had mentioned. I just want to make sure that all my stuff is in order.

I also want to be able to decide if it is even worth doing smaller loans like this.

DANGER WILL zero ROBINSON!

Indiana law says if the buyer backs out of a land contract YOU must reimburse every penny they paid you, including interest, taxes and insurance you collected.

Land contract is NOT a good method in Hoosierland.

Ask me how I know!

"I trust the guy" is a path to disappointment and loss.

ALWAYS stay in control of your asset until paid in full. NEVER count on them actually paying the taxes and ins over the long term. Sure they start with good intentions but then THEIR life happens and they need the money.

Plus the ins needs to be in YOUR name, under YOUR control in case the house burns down.

Be the nice guy you are by giving them the opportunity and a deal but secure it with proper paperwork.

BRAD

DANGER WILL zero ROBINSON!

Indiana law says if the buyer backs out of a land contract YOU must reimburse every penny they paid you, including interest, taxes and insurance you collected.

Land contract is NOT a good method in Hoosierland.

Ask me how I know!

"I trust the guy" is a path to disappointment and loss.

ALWAYS stay in control of your asset until paid in full. NEVER count on them actually paying the taxes and ins over the long term. Sure they start with good intentions but then THEIR life happens and they need the money.

Plus the ins needs to be in YOUR name, under YOUR control in case the house burns down.

Be the nice guy you are by giving them the opportunity and a deal but secure it with proper paperwork.

BRAD

DANGER WILL zero ROBINSON!

Indiana law says if the buyer backs out of a land contract YOU must reimburse every penny they paid you, including interest, taxes and insurance you collected.

Land contract is NOT a good method in Hoosierland.

Ask me how I know!

"I trust the guy" is a path to disappointment and loss.

ALWAYS stay in control of your asset until paid in full. NEVER count on them actually paying the taxes and ins over the long term. Sure they start with good intentions but then THEIR life happens and they need the money.

Plus the ins needs to be in YOUR name, under YOUR control in case the house burns down.

Be the nice guy you are by giving them the opportunity and a deal but secure it with proper paperwork.

BRAD

I need to look into the contract that we signed. I keep the place in my name, but I make him pay the taxes which I verify online.

The reason for not keeping the insurance in my name is if something happens and he gets sued. I have no control over who he puts in the place and if they are an ambulance chasers dream I want no part in it.

Thanks for the info, although it is scary.

Ken, the place is in my name. No mortgage.

I just sent an email to my agent to get the info. Hopefully he will respond fast like.

Following up after I spoke with my insurance agent.

I am covered as long as I am named additional insured on the policy.

One of the places is covered by him so he checked and I am named as such.

Learned some things while I was at the convention regarding my hard money tactics.

Mostly I learned that I am doing them all wrong.

Not being safe with my deals at all.

I need to restructure my thinking on this topic and come up with a more viable game plan.

We've thought about lending Zero but just do not know enough about it to step into that pool...

I learned a bit at the con about lending and notes.

Coincidentally the guy that wants my money called me yesterday. I was on a long road trip for supplies so we had time for a nice chat.

He is willing to pay an attorney for his time. One that does RE related things.

This might help get us set up where we are legal and safe.