Moneylender Forums

Lender:

I am doing my 1098s. I have one loan where the lender changed (both run from Moneylender). The program appears to generate only one 1098 for the borrower. The 1098 lists the first lender as the lender and includes interest paid to the second lender. Is there a way to split the 1098s so that each lender has the correct amount reported?

Thanks!

Josh:

I get this question all the time.

You asked “Is there a way to split the 1098s so that each lender has the correct amount reported?”

Yes, but you probably don’t want to file two 1098 forms. The IRS doesn’t want multiple 1098s for a single mortgage. The recipient fields are just who received the money, not who ultimately pocketed the interest. If I was a loan servicer, I’d be receiving the payments and then passing 100% of the funds to the actual owners. I’d file 1098 forms with myself and my tax ID noted as the recipient of the payments on the form. But at no point does the IRS assume that the money that I received is actually mine to keep or have to pay taxes on. I can say I received $25 million in interest and then file a tax return showing $82,000 in profit and the IRS won’t care. The 1098 interest does not need to match up with the profit the recipient shows on their tax forms.

I’m trying to help you determine if you should file multiple 1098 forms, or if you should only file one form in accordance with the Form 1098 instructions.


Here’s the relevant text from the Form 1098 Instructions (emphasis mine):

Generally, if you receive reportable
interest payments (other than points) on behalf of
someone else and you are the first person to receive the
interest, such as a servicing bank collecting payments for
a lender, you must file this form. Enter your name,
address, TIN, and telephone number in the recipient entity
area. You must file this form even though you do not
include the interest received in your income but you
merely transfer it to another person. If you wish, you may
enter the name of the person for whom you collected the
interest in box 10. The person for whom you collected the
interest need not file Form 1098.

However, there is an exception to this rule for any
period that (a) the first person to receive or collect the
interest does not have the information needed to report on
Form 1098, and (b) the person for whom the interest is
received or collected would receive the interest in its trade
or business if the interest were paid directly to such
person. If (a) and (b) apply, the person on whose behalf
the interest is received or collected is required to report on
Form 1098. If interest is received or collected on behalf of
another person other than an individual, such person is
presumed to receive the interest in a trade or business.

So who actually received the money? One entity all year, or two. It doesn’t matter who owned the loan during the year, only who the payments were received by.

Lender:

Thanks.

I will take a look at this. Sorry to bother you with something I could have looked up!

Not a problem.

I get asked for this all the time, it’s a very common question and often there’s a misconception about what information the 1098 returns convey.

Everyone’s afraid if they send a 1098 from one recipient, that filer also has to show the money somewhere on their income. That’s definitely not the case at all.

The IRS wants to know how much interest a person could claim as a deduction on their income tax, and that’s the only purpose the 1098 forms can fill. They don’t contain the information necessary for the IRS to determine how much profit the filer of the 1098s made nor the lender. If a borrower says “I paid $50k in interest!” on their income tax return and their 1098s only show $10k in interest, the borrower just landed on the short list for getting audited. That’s the only function of the 1098 forms – to fight individual tax fraud. Lenders often make significantly more profit than just the interest on a loan – usually they sell the property for more than they invested, making some of the principal of the loan also profit. The lender isn’t even the one filing the 1098s necessarily, and there’s nothing requiring a lender to file a 1098, only the recipient of payments on a residential mortgage to an individual borrower over $600 must file 1098 forms. Usually that means the lender, but not always and the IRS doesn’t care if it is or isn’t the lender.

There are very few cases where you’d actually want to send two 1098s. If you were an accountant and had two distinct customers, and each one had their own portfolios and you had access to both. And one of your customers sold a loan to your other customer, you’d be helping send two 1098 forms. But it’d already be set up that way because you’d have the one loan record in one portfolio where the loan was written off at the time of sale. And you have a new loan record in the second portfolio where the loan begins receiving payments under the new owner. And these are two different entities and the borrower stopped writing checks to entity1 and started writing checks to entity2 at the time of the sale and it’s two loans in two different portfolios. Moneylender would already be generating two different 1098s in this case.