Do you have to file Form 1098 with the IRS and send a copy to your borrowers? It depends on one question: are you receiving mortgage interest as part of a trade or business? Attorney Roger J. McClure lays out the general rules and five examples.
The general rules for Form 1098
- If you or your company, corporation, partnership or trust are in a trade or business, and you receive mortgage interest incident to that trade or business from individuals, you must give a Form 1098 by January 31 to each individual who paid you at least $600 of mortgage interest in the last calendar year. The form lists all the interest received, and a copy goes to the IRS. You must also file Forms 1098 and 1096 with the IRS by February 28.
- Even if you meet that test, you don’t report to the IRS or the payer any interest paid by a corporation, trust, company, estate or other entity that is not an individual.
- You only report individuals whose mortgage interest payments come to $600 or more per mortgage in one calendar year.
- If you or your entity are not in a trade or business, or your mortgage interest is not incident to a trade or business, you don’t have to send Form 1098 to the IRS or your borrowers.
These dates and the $600 threshold are the rules as they stood at the time of writing.
Five examples: who files and who doesn’t
Example 1. You buy, hold and sell mortgages from time to time, usually only three or four a year, held in your name. You report the interest income on Schedule B and your interest and other expenses on Schedule A. This level of activity doesn’t rise to a trade or business. It’s an investment activity, so no 1098s.
Example 2. You formed a corporation, licensed it as a mortgage lender and set up an office in your home. Your spouse works, and the lending corporation is your main source of income. You make about 100 loans a year and borrow a large part of your capital. This is a trade or business, and you must provide 1098s to your qualifying non-corporate borrowers and to the IRS.
Example 3. The same facts as Example 2, but five of your mortgages each paid less than $600 in interest. You report none of the payers who paid less than $600 in the last calendar year.
Example 4. Your corporation’s pension fund buys about 10 mortgages, holds them to maturity, and keeps buying more as the fund grows. The pension fund is a passive investor, not intending to be in a trade or business. It provides no 1098s to anyone.
Example 5. You run a small loan company on the side of your regular job. It isn’t incorporated, and you report its income and expenses on Schedule C. You buy, sell or hold 10 to 15 mortgages a year. You want the IRS to see you as being in a trade or business so you can deduct your expenses on Schedule C. Because you want to be treated that way for all purposes, you provide 1098s to qualifying non-corporate borrowers and to the IRS.
What decides it, and the cost of getting it wrong
The critical elements are that you or your entity are engaged in a trade or business, and that you receive the mortgage interest incident to that trade or business. You don’t have to be in the business of mortgage lending itself. The loan servicer who has enough information to report mortgage interest subject to Section 6050H must report it.
If you don’t make the required reports, you can be fined $50 per form, up to $100,000 (the penalty at the time of writing).
If you can’t tell whether your mortgage interest is incident to a trade or business, it’s generally best to file. Filing avoids the penalties and adds support to your claim that your lending business expenses are deductible.
