Question
If I earned interest on a promissory note, but incurred expenses to loan that money, how do I report that?
I loaned money to a real estate investor who then used the money to fix and flip a property. He gave me a promissory note. After the sale of the home, he paid me the original principal of the loan back plus interest, thus fulfilling and closing the note. But, I incurred expenses to grant him that loan. I took a HELOC on my primary residence and used those funds to make the loan for this investment. I made payments on the HELOC to the bank with interest, albeit at a lower interest rate than I received from the promissory note. The idea is simple arbitrage.
To illustrate the example with simple numbers:
Borrow $10K HELOC @ 3% = $300 interest expense incurred
Loan out $10K Promissory Note @ 10% = $1,000 interest earned
Net interest earned = $700
So do I have to report the full $1,000 interest earned, or can I deduct that $300 interest expense and report the net $700 interest earned?
To illustrate the example with simple numbers:
Borrow $10K HELOC @ 3% = $300 interest expense incurred
Loan out $10K Promissory Note @ 10% = $1,000 interest earned
Net interest earned = $700
So do I have to report the full $1,000 interest earned, or can I deduct that $300 interest expense and report the net $700 interest earned?
