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Anne, Master Tax Preparer

Category: Tax

Satisfied Customers: 2382

Experience: Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses

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I bought a Promissory Note for a deep discount. I paid roughly

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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?

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

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?