Thanks for your insight. I appreciate it, really. Here are my questions;
How is the income from mortgage payments to the note holder taxed? Is it unearned income at a lower rate? Are there any tax tips you might recommend?
Is it true that a note buyer who buys a NPL at a discount from a bank has to pay tax on the difference between the UPB and the purchase price over the life of the loan? If yes, would it be at a capital gains rate? Other? Does it apply if you buy the notes from a source other than a bank? Any tax tips you might share? Thanks
What is the average price of NPL's these days, as a percentage of BPO or UPB?
Ask a accountant how treated.
Buy inside an IRA or do a 1031 Exchange.
Pete, you have interest income earned, just as from any other investment on deposits, the note rate scheduled isn't your yield, it's based on the discount.
I've never heard of any special tax treatment based on who originate a loan nor is that proper accounting under generally accepted accounting principles. I haven't been in bank compliance as to taxation matters lately, an insured institution could be required in certain matters to carry loans at the UPB, reserves, etc. but you aren't them as an individual note holder. Your tax liability is only on amounts received, the UBP, discount, yield only play on funds received, you're on a cash basis.
When you sell the note, you'll hopefully have a gain, your purchase price is your basis, if you buy with a 25% discount, then 25% of the annual principal reduction is regular income on the investment.
Be aware too, that if you accept any deed in lieu of foreclosure, that transaction is the same as the full amount being paid and any discount is taxable income. The basis for the property is then that amount plus applicable expenses to acquire the deed. This is an asset conversion that will book at the UPB for accepting the property.
If a note is modified and a fee or premium is charged, that is income in that period, financed or not.
Now you have me whistling Trumpeter's Fanfare! :)