Hi,
I was hoping you can help with a question I have around a promissory note that I entered a 7 years back and wanted some feedback on how the repayment of the promissory note will be taxed:
For the ease of numbers, here is a smaller scale of what happened:
Term:
I lent 1, 000 for three years at a 8% Interest rate.
Unfortunately, the borrower could not repay the amount due to health issues he was undergoing.
Fast forward 7 years and now, the borrower has stabilized and wants to make payments
He has asked for me to forgive the interest/back interest owed and he will pay me out in equal sums of $100/ month until he pays me the full amount of my principal plus an extra 240.
If all goes well, I will eventually be paid 1,240 (1,000 principal + 240).
Now to my question:
Since I will be eventually making 24% on the initial capital how do I calculate this for tax purposes?
-Of each payment I receive of $50/ month do I account .24% or $12 to be taxable (interest income) ?
OR
- Do I wait till I receive my original basis back (1,000) before factoring the remaining $240 to be considered taxable income?
Also, any amount received above my basis, is this 1099-INT and does this get taxed at my ordinary rates?
Thank you for the clarification.
I was hoping you can help with a question I have around a promissory note that I entered a 7 years back and wanted some feedback on how the repayment of the promissory note will be taxed:
For the ease of numbers, here is a smaller scale of what happened:
Term:
I lent 1, 000 for three years at a 8% Interest rate.
Unfortunately, the borrower could not repay the amount due to health issues he was undergoing.
Fast forward 7 years and now, the borrower has stabilized and wants to make payments
He has asked for me to forgive the interest/back interest owed and he will pay me out in equal sums of $100/ month until he pays me the full amount of my principal plus an extra 240.
If all goes well, I will eventually be paid 1,240 (1,000 principal + 240).
Now to my question:
Since I will be eventually making 24% on the initial capital how do I calculate this for tax purposes?
-Of each payment I receive of $50/ month do I account .24% or $12 to be taxable (interest income) ?
OR
- Do I wait till I receive my original basis back (1,000) before factoring the remaining $240 to be considered taxable income?
Also, any amount received above my basis, is this 1099-INT and does this get taxed at my ordinary rates?
Thank you for the clarification.