401k and issuing a 1099INT

Technical topics regarding tax preparation.
#1
merlin  
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Person A used his own 401k (not sure if self-directed or solo k but will find out later) to loan to another person (call him B), for a real estate deal B did.

Does B need to issue A's 401K plan a 1099INT for the interest?
Thinking that not, since the 401K plan is a tax shelter and the earnings/interest are tax free until withdrawals made.

Can B still claim the interest on schedule E as other interest, also when no 1099 is issued? just based on cash flow of payments and amortization schedule.

Many thanks
 

#2
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https://www.irs.gov/pub/irs-pdf/i1099int.pdf

File Form 1099-INT, Interest Income, for each person:
1.To whom you paid amounts reportable in boxes 1, 3, and 8 of at least $10 (or at least $600 of interest paid in the course of your trade or business described in the instructions for Box 1. Interest Income, later);
2.For whom you withheld and paid any foreign tax on interest; or
3.From whom you withheld (and did not refund) any federal income tax under the backup withholding rules regardless of the amount of the payment.

Report only interest payments made in the course of your trade or business including federal, state, and local government agencies and activities deemed nonprofit, or for which you were a nominee/middleman. Report interest that is taxable OID in box 1 or 8 of Form 1099-OID, Original Issue Discount, not on Form 1099-INT. Report interest that is tax-exempt OID in box 11 of Form 1099-OID, not on Form 1099-INT. Report exempt-interest dividends from a mutual fund or other regulated investment company (RIC) on Form 1099-DIV.

For a specified private activity bond with OID, report the tax-exempt OID in box 11 on Form 1099-OID, and the tax-exempt stated interest in boxes 8 and 9 on Form 1099-INT.

Exceptions to reporting.
No Form 1099-INT must be filed for payments made to exempt recipients or for interest excluded from reporting.

Exempt recipients.
You are not required to file Form 1099-INT for payments made to certain payees including, but not limited to, a corporation, a tax-exempt organization, any individual retirement arrangement (IRA), Archer medical savings account (MSA), Medicare Advantage MSA, health savings account (HSA), a U.S. agency, a state, the District of Columbia, a U.S. possession, a registered securities or commodities dealer, nominees or custodians, brokers, or notional principal contract (swap) dealers. For additional exempt recipients, see Regulations section 1.6049-4 for more information. For situations when you are required to file Form 1099-INT for certain recipients that are otherwise generally exempt, but that receive credits from tax credit bonds, see Interest to holders of tax credit bonds under Box 1. Interest Income, later.

Interest excluded from reporting.
You are not required to file Form 1099-INT for interest on an obligation issued by an individual, interest on amounts from sources outside the United States paid outside the United States by a non-U.S. payer or non-U.S. middleman, certain portfolio interest, interest on an obligation issued by an international organization and paid by that organization, and payments made to a foreign beneficial owner or foreign payee. See Regulations section 1.6049-5 for more information.

Other exception.
Do not report tax-deferred interest, such as interest that is earned but not distributed from an IRA
Dave

Taxation is the price we pay for failing to build a civilized society. ~ Mark Skousen
 

#3
JR1  
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I wonder if it's a prohibited transaction?
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#4
merlin  
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SlipperyPencil - thanks a lot! that's a great summary.
JR1 - as far as I know, it's a legit transaction and is pretty common.
 

#5
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I’m thinking you may have two different transactions here. A took a loan from his 401k. He then loaned money to B (could be same amount or different amount). If B pays interest to A, A has taxable income. I don’t think the 401k can make a loan to B, so wouldn’t have interest income from B.
 

#6
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Whether a 1099-INT needs to be issued by "B" comes down to whether B is a financial instution (threshold is $10 or more of interest paid) or whether B paid the interest in the ordinary course of his trade or business (threshold is $600 or more of interest paid).

Who the interest income belongs to depends on more facts. Did "A" take a loan from your run of the mill W-2 employee 401(k) and then turn around and loan the cash to B? If yes, A is the recipient of the interest income for tax purposes.

OR, was the money lent out of a self-directed 401(k) plan directly to B? If yes, the 401(k) is the recipient of the interest income.
 

#7
merlin  
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ManVsTax, you presented it right. It's a self-directed 401K (A's) that loaned to B.
B issued a 1099 to the 401k before I got involved, although the 401k will not make any use of it. B will use it in his schedule E rental.
Thank you all for your input.
 


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