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Anne
Anne, Master Tax Preparer
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I bought a Promissory Note for a deep discount. I paid roughly

Resolved Question:

I bought a Promissory Note for a deep discount. I paid roughly $50K for a $100K Note at 7% interest. It looks like the Maker of the Note is going to pay it off in full over a period of ten years. How do I characterize the payments I receive for tax purposes? Some part return of capital? Some part interest? The rest?
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

NPVAdvisor :

Hi,

NPVAdvisor :

Yes, you should amortize the 50,000 over 10 years, to show that a portion of the npayment is a return of principal and the remainder is interest

NPVAdvisor :

For example, if we assume that he pays the payment yearly, 7% of 50,000 is 3500 (that would be your reportable interest income) The remainer of whatever the person pays is a return of your principal for that tax year

NPVAdvisor :

If you'd like to give me the payment schedule I can do an amortization of the note for you

NPVAdvisor :

But if the borrower is going to make unpredictable, variable payments the whatever remaining principal there is at the beginning of the next year (x 7%) is your interest income and the rest of the payment is a return of principal

NPVAdvisor :

So, in the example I gave, if the person's payment for the year is 10,000, then 3500 is interest income for you and the remaining $6,500 is simply a return f your principal that is not taxable. Then in the second year, there isNNN-NN-NNNN= 43500 of principal left to pay, so your interest income for year two would be 43,500 x 7% = 3045 ... and the non-taxable return of you principal (again, of the borrower makes a 10,000 payment, would be 6955.

NPVAdvisor :

Hope this helps

NPVAdvisor :

Lane

NPVAdvisor :

If you have a set payment schedule, let me knows and I can do the amortization schedule for you.

NPVAdvisor :

If this HAS helped, I would appreciate a feedback rating of 3 (OK) or better … That's the only way they will pay us here.


HOWEVER, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question

Expert:  Lane replied 1 year ago.

Hi Galen,

If you can give me some of the specifics mentioned above, I can helps you work through this.


Let me know

Lane
Customer: replied 1 year ago.

I bought the Note for $50,000 but the Maker is intending to pay me the full $100,000 face value of the note at 7% interest. So over ten years I am going to receive $100K for my 50K investment. If he pays me, roughly, $10,000 a year wouldn't $7,000 of that be interest, a portion of the remainder a return of capital, and the other portion something else?

Expert:  Lane replied 1 year ago.

Sorry, mis-read your question

Just to keep the numbers on an annual basis, if I calculate the payment on a 10 year loan of 100,000 at 7% the payment is 14,237.75

You investment, however, is 50,000

So at that payment level, your return (interest) is around 25.5 percent.

IRS will expect you to pay interest based an amortization of that 50,000 amount invested.

See this:

Principal Interest Payment
$50,000.00 $12,773.65 $14,237.75
$48,535.90 $12,399.62 $14,237.75
$46,697.77 $11,930.02 $14,237.75
$44,390.04 $11,340.46 $14,237.75
$41,492.76 $10,600.28 $14,237.75
$37,855.29 $9,671.01 $14,237.75
$33,288.54 $8,504.33 $14,237.75
$27,555.12 $7,039.59 $14,237.75
$20,356.96 $5,200.66 $14,237.75
$11,319.87 $2,891.92 $14,237.75
Expert:  Anne replied 1 year ago.

.

Expert:  Anne replied 1 year ago.

.

Anne, Master Tax Preparer
Category: Tax
Satisfied Customers: 1922
Experience: Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
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Anne
Anne
Master Tax Preparer
1902 Satisfied Customers
Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses