Tax

Have a Tax Question? Ask a Tax Expert

Tax

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

I bought a Promissory Note...
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?
Show More
Show Less
6/21/2013
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12,873
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
Verified

Hi,

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

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

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

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

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.

Hope this helps

Lane

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

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

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 reply replied 4 years 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?

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:

<table border="0" cellspacing="0">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
Anne, Master Tax Preparer
Category: Tax
Satisfied Customers: 2,439
Experience: Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
Verified

.

.

Anne, Master Tax Preparer
Category: Tax
Satisfied Customers: 2,439
Experience: Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
Verified
Anne, Master Tax Preparer
Category: Tax
Satisfied Customers: 2,439
2,439 Satisfied Customers
Experience: Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses

Anne is online now

A new question is answered every 9 seconds

• Ask an ExpertExperts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
• Get a Professional AnswerVia email, text message, or notification as you wait on our site. Ask follow up questions if you need to.

Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... Justanswer.com.
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.

## What Customers are Saying:

I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response...

T.G.WMatteson, IL

I WON!!! I just wanted you to know that your original answer gave me the courage and confidence to go into yesterday's audit ready to fight.

BonnieChesnee, SC

Great service. Answered my complex tax question in detail and provided a lot of additional useful information for my specific situation.

JohnMinneapolis, MN

Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with.

OrvilleHesperia, California

Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help.

Mary C.Freshfield, Liverpool, UK

This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!!

AlexLos Angeles, CA

Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult.

GPHesperia, CA

< Previous | Next >

## Meet the Experts:

Wallstreet Esq.

Tax Attorney

586 satisfied customers

10 years experience

Mark D

Enrolled Agent

1,300 satisfied customers

MBA, EA, Specializing in Business and Individual Tax Returns and Issues

Richard

Tax Attorney

4,310 satisfied customers

29 years of experience as a tax, real estate, and business attorney.

Robin D.

13,695 satisfied customers

15years with H & R Block. Divisional leader, Instructor

Megan C

Certified Public Accountant (CPA)

8,651 satisfied customers

Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level

jgordosea

Enrolled Agent

2,885 satisfied customers

I've prepared all types of taxes since 1987.

R. Klein, EA

Enrolled Agent

1,839 satisfied customers

Over 20 Years experience

< Previous | Next >

Related Tax Questions
Can I report rental income in my tax return on a property
Can I report rental income in my tax return on a property thar is owned by my father? He does not live in the US is not a US citizen and can sign a document to allow me to receive the rental… read more
Robin D.
13,695 satisfied customers
IRS Experts Corporation changed name. 2016 tax return has
IRS ExpertsCorporation changed name. 2016 tax return has been filed with a new name. Taxpayer recently received notice which has old name. How do we change the name with IRS?… read more
Barbara
Enrolled Agent, Paralegal
3,473 satisfied customers
When bank refinance do they verify tax returns with IRS?
When bank refinance do they verify tax returns with IRS? Because I did the refinance and bank didn't ask me for transcript signature, or Can they do it without my authorization ?… read more
Certified Financial Planner(R), Pro
Master\u0027s Degree
734 satisfied customers
Need advice for my tax return. Only income: Airbnb. I'm
Need advice for my tax return. Only income: Airbnb. I'm renting a room and sub renting it through Airbnb … read more
abci168
Principal
27 satisfied customers
I filed for an extension to file my 2017 income tax return.
I filed for an extension to file my 2017 income tax return. I recently suffered a stroke - 6 weeks ago - and have been unable to finalize my return. I should be able to file it within the next 30 days… read more
Barbara
Enrolled Agent, Paralegal
3,473 satisfied customers
Received notice from IRS. On my tax return missed to check
Received notice from IRS. On my tax return missed to check health care coverage for year 2014, 2015 and 2016, Do I have to file Form 1040 X for each year or can I do all three on one by checking these… read more
Robin D.
13,695 satisfied customers
We are interested in buying a solar farm. What are the tax
Hi! We are interested in buying a solar farm. What are the tax incentives? Is it just the 30% tax credit, or will we get to depreciate all the solar equipment with bonus depreciation? Thanks! … read more
emc011075
Senior Tax Specialist
Bachelor's Degree
16 satisfied customers
Can a C-Corp file a "final" return with the IRS if there are
Can a C-Corp file a "final" return with the IRS if there are no longer any business operations, but the company bank accounts remain open?… read more
taxmanrog
Master\u0027s Degree
698 satisfied customers
Income tax question. Are there any ways that interest on an
income tax question. Are there any ways that interest on an insurance policy can be tax deductible? … read more
Robin D.
13,695 satisfied customers
My husband has worked under the table for several reasons
my husband has worked under the table for several reasons for many years. He would like to figure out how to move 'back onto the radar" How do we go about figuring out what to do? … read more
emc011075
Senior Tax Specialist
Bachelor's Degree
16 satisfied customers
US FEDERAL INCOME TAX. QUESTION: A SINGLE WOMAN OWNS A
US FEDERAL INCOME TAX. QUESTION: A SINGLE WOMAN OWNS A HOUSE, HER PRINCIPAL RESIDENCE, AND LIVES IN IT FOR 4 YEARS. IN 2017 SHE MARRIES A MAN WHO WILL ALSO USE IT AS HIS PRINCIPAL RESIDENCE BUT NOT HA… read more
Mark Taylor
Certified Public Accountant
Masters
2,220 satisfied customers
I have a cleint who i did a tax return for that the IRS
I have a cleint who i did a tax return for that the IRS rejected e-file as someone else took the dependent; The child in question lives with tax payer. The IRS direction on reject basically said check… read more
Robin D.
13,695 satisfied customers
Can franking credit on an Australian income tax return be
Can franking credit on an Australian income tax return be used on Form 1116 as tax paid on the franked distributions? … read more
Robin D.
13,695 satisfied customers
I need to file an amendment to my tax returns to show income
I need to file an amendment to my tax returns to show income from a personal loan to my brother for his business needs. How do I categorize it in Turbo Tax?… read more
Mark Taylor
Certified Public Accountant
Masters
2,220 satisfied customers
My 2016 tax return was denied electronially by the IRS. The
My 2016 tax return was denied electronially by the IRS. The social security number for the child I listed as a dependant had alredy been used by another party. I was instructed to send in a paper return and wait for notification. … read more
Lane
JD, CFP, MBA, CRPS
12,873 satisfied customers
Tax question. Does the IRS keep copies of the tax returns
Tax question. Does the IRS keep copies of the tax returns from 2014?. They are claiming I did not report my Soc Sec income then and they refused to accept the amended return my tax woman filed. Now I … read more
emc011075
Senior Tax Specialist
Bachelor's Degree
16 satisfied customers
This is my first time in US submitting income tax return for
Hi This is my first time in US submitting income tax return for me my kids did not had ITIN generated..when my tax consultant submitted ITS documents he suggested me to submit ITIN application for bot… read more
Robin D.
13,695 satisfied customers
Is a 1040 US Individual Income Tax Return federal income
Hi Is a 1040 US Individual Income Tax Return federal income taxes owed to the US government? Or is it FICA? I received a letter owing some back taxes and since I'm a priest with a weird set of tax exc… read more
ABC Accounting Group
Bachelor\u0027s Degree
682 satisfied customers
Disclaimer: Information in questions, answers, and other posts on this site ("Posts") comes from individual users, not JustAnswer; JustAnswer is not responsible for Posts. Posts are for general information, are not intended to substitute for informed professional advice (medical, legal, veterinary, financial, etc.), or to establish a professional-client relationship. The site and services are provided "as is" with no warranty or representations by JustAnswer regarding the qualifications of Experts. To see what credentials have been verified by a third-party service, please click on the "Verified" symbol in some Experts' profiles. JustAnswer is not intended or designed for EMERGENCY questions which should be directed immediately by telephone or in-person to qualified professionals.

Disclaimer: Information in questions, answers, and other posts on this site ("Posts") comes from individual users, not JustAnswer; JustAnswer is not responsible for Posts. Posts are for general information, are not intended to substitute for informed professional advice (medical, legal, veterinary, financial, etc.), or to establish a professional-client relationship. The site and services are provided "as is" with no warranty or representations by JustAnswer regarding the qualifications of Experts. To see what credentials have been verified by a third-party service, please click on the "Verified" symbol in some Experts' profiles. JustAnswer is not intended or designed for EMERGENCY questions which should be directed immediately by telephone or in-person to qualified professionals.

Show MoreShow Less