Mortgage Note Accounting

[Alex Morstadt]

Hello CPAs! 

I am struggling to get a definitive answer to the question - are payments from a Performing Note passive investment income or are they ordinary income? I have seen it described as both - and lets face it, my PN income is way more passive then a Rental.

I would also ask, what are the tax consequences for an early payoff of the PN - or NPN for that matter? Again there is zero work done by the investor, in this example.

Also - Im looking for a great CPA in NOVA - DMV who is RE Small Business priced. 

Thanks in advance!

[Ashish Acharya]

Originally posted by @Alex Morstadt:

Hello CPAs! 

I am struggling to get a definitive answer to the question - are payments from a Performing Note passive investment income or are they ordinary income? I have seen it described as both - and lets face it, my PN income is way more passive then a Rental.

I would also ask, what are the tax consequences for an early payoff of the PN - or NPN for that matter? Again there is zero work done by the investor, in this example.

Also - Im looking for a great CPA in NOVA - DMV who is RE Small Business priced. 

Thanks in advance!

The interest income is not considered passive income. It is considered portfolio income.

All passive, portfolio, and ordinary income are taxed at the same rate. 

This categorization only comes into play when you have a loss from your passive activity as you can’t use the loss to offset other income categories, generally. There are some exceptions. 

The payoff has no tax implications. 

Also not the entire payment is you income, only the interest portion is your income. You don’t get taxed at the return of your principle amount.