Hard money loans are fast, flexible, and deal-saving—but what happens when tax season rolls around?

If your investor clients are using hard money to fund flips or rental acquisitions, they need to know what it means for their tax return. And as their broker or advisor, the more informed you are, the more trust you build.

Here’s a clear breakdown of what to consider—and how to help clients stay ahead of tax-time headaches.

For Flips: Ordinary Income, Not Capital Gains

Let’s start with flips. When a property is bought, improved, and sold quickly, it’s considered dealer activity—not investment activity.

That means any profit is taxed as ordinary income, not long-term capital gains. This often puts your client in a higher tax bracket than they expect—especially if they’ve had a good year.

Also, they can’t use the 1031 exchange rule here—flips are excluded.

Pro tip: Encourage your clients to set aside enough for taxes at the time of sale. The IRS doesn’t like surprises.

Hard Money Interest Is Tax-Deductible

Here’s the good news: interest paid on a hard money loan is typically tax-deductible as a business expense—as long as the borrower is operating through an entity (LLC, S-corp, etc.) or can demonstrate active investment business activity.

This deduction can offset some of that flip profit or reduce taxable income on a rental.

Watch out: If your client is operating as an individual without a clear business structure, the IRS may disallow certain deductions.

Points and Fees? It Depends

Points paid on a hard money loan may be deductible—but not always in the year they’re paid. For flips, they’re usually part of the cost basis and deducted when the property is sold.

For rental properties, points may need to be amortized over the life of the loan. Your client’s CPA will likely want the full loan documents and closing statement to handle this correctly.

For Rentals: Depreciation and Long-Term Deductions

Hard money can be a great bridge tool to acquire rental properties. But once a property is stabilized and rented, your client can start deducting:

  • Depreciation (structure, not land)
  • Property taxes and insurance
  • Mortgage interest
  • Management fees, maintenance, and repairs

The key is having clean records and proper documentation of rehab vs. ongoing maintenance costs.

Bonus Tip: If the property is refinanced and the hard money loan is paid off, that may trigger amortization adjustments on loan fees or closing costs.

Pair Lending with Planning

Hard money loans are powerful tools—but they come with tax strings attached. The smartest investors don’t just chase ROI. They plan ahead, track expenses, and work closely with tax professionals.

As a broker, you don’t need to be a CPA—but knowing the basics builds trust and positions you as a next-level advisor.

At Lending Bee, we don’t just fund fast—we help you think smart. If you or your client need help running numbers or structuring a deal cleanly, we’re ready.

Because a great deal should look just as good in April as it did at closing.