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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10103
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Not looking , just tax law. Question = An installment

Customer Question

Not looking for advise, just tax law. Question = An installment note I owned thru a mortgage co. has paid off. I had paid the tax on the earned interest using the 1099 form.
Will there be tax on the returned principle if it is not re-invested by a certain time. What is the tax law? Thank you
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.
Hi,
No.
Any payment of principal is simply repaying money that was borrowed (not taxed to you when received, and not deductible to the lender when lent).
BECAUSE it was a loan ... to be paid back.
The INTEREST, as you have mentioned, IS deductible by you (and taxable as interest income to the lender).
Title 26 of the US code (called the Internal Revenue Code anecdotally) only taxes net increases in wealth. For example, if you borrowed money and DID NOT pay it back, this becomes taxable as income to and THEN a write-off as a bad debt to the lender.
There IS no tax law that says repayment of principal is not taxable. The code doesn't work that way. The code simply says that all increases in net wealth ARE taxable, and lists many of them by defining gross income (capital gains - selling something for more than you have invested in it, bartering gains - trading a $2,000 motorcycle for a $10,000 car, gambling winnings, earned income, dividend and interest income, rental income, etc., etc.)
But the only time PRINCIPAL in a loan is taxed is when it is NOT repaid.
Make sense?
Let me know if you have questions ...
Lane