Tax questions on note with a balloon payment

[Andrew Jacobson]

Hi all,

If I were to purchase a note at a discount that included a balloon payment, how would that balloon payment be taxed?

example:

UPB of 100k bought for 80k. If the loan has a 5 year balloon but a long amortization, little principal would be paid off over the 5 years, say 4k. How would that balloon of 96k in five years be taxed compared to my 80k investment. I know the interest payments are normal income but would the 16k captured on the balloon payment be normal income or capital gains? many thanks in advance