Real Estate Broker · Miami Beach, FL · Member since 2014 · 65 posts · 11 votes
Moving this post to tax forum... Think answer is no, can't claim unpaid interest on 1099-C, but @paresh patel brings up good point about what hte Box 3 pertains to. Anyone know what the purpose of this is?
Also why does it say this in the 1099-c Instructions form: "A debt is any amount owed to you, including stated principal, stated interest, fees, penalties, administrative costs, and fines. The amount of debt canceled may be all or only part of the total amount owed." and "Interest. You are not required to report interest. However, if you choose to report interest as part of the canceled debt in box 2, you must show the interest separately in box 3." ?
I believe the borrower or debtor would indeed have to pay taxes on the income amount noted in box 2 on the 1099-C. In any event, that's the borrowers problem - we have enough to worry about
CPA · New York, NY · Member since 2016 · 203 posts · 132 votes
9y
@Vilson Nikollaj Whether or not box 3 is taxable is ultimately decided by if the interest would have been deductible if the debt was actually paid.
For example, if the loan was a personal loan (interest is not deductible if paid), box 3 would be taxable. If it is a business loan (interest is deductible if paid), it would not be taxable.
Investor · Litchfield County, CT · Member since 2017 · 54 posts · 9 votes
9y
Thanks @Vilson Nikollaj, @Taylor Brugna
However, this answers a question that I don't think we were asking.
In the case of loans made through crowdfunding marketplaces such as Patch of Land or Peerstreet, in all cases, the interest that the borrowers pay is, of course, deductible for them. By the same token, of course, the interest we earn as Lenders or Investors is also taxable. This is not in dispute, (or the question we were asking)
The question we're looking to solve, i believe, is in the case of a default by a CF marketplace borrower:
Assuming borrower repays most but not all principal and none of the interest due, can't the lender send a 1099-c to the borrower with the amount of defaulted principal lost AND interest lost in box 2, and the amount of interest lost (only) in box 3?
In this way, the lender gets a deduction for the full amount of lost principal AND interest (and yes, the Amt in box 2 of 1099-c becomes taxable income to the borrower for that tax year.
(Supposedly, the final amount of deductible interest claimed (in box 3) is calculated based off of the date when the debt was officially 'forgiven.')