CPA familiar with notes

9 Replies

@Mark Gibbs

Taxation on notes is complex. You should really vet the CPA that you decide to go with.
Taxation on notes depends on several factors such as is the note performing or non-performing?
Was the note adjusted?

In my experience, it's more about doing the bookkeeping properly and not so much the CPA.  From a tax perspective, notes with their total lack of tax advantages are far more simple than real estate.

Try talking with Nathaniel (Nate) Busch of Busch Tax Company. He's a BP member and has been doing our taxes for a couple of years now. Been very happy with his services and responsiveness.

@Mike Hartzog

I wholeheartedly agree. Bookkeeping in this business is far more complex and cumbersome than traditional real estate. There are not too many who know how to properly record and classify payments and assets in their books. Splitting up principal and interest payments as well as amortizing principal pay down on the asset is crucial.

As far as taxation goes, everything is generally just considered active income except for when the loan is resold, especially after holding for 1 year. Then long-term capital gains may or may not come into play

@Chad U.

Yeah, I spent some time to figure this stuff our for my own business.  Fortunately I was able to get some advice and confirmation of my current practices from a note savvy accountant at the IMN conference a few years back.  One really tricky aspect comes into play with partials.  As the purchaser of a partial, there is a separate amortization schedule in the contract which differs from that of the underlying loan.  So the principal and interest breakout received from the loan servicer is not the breakout that needs to be applied in the books.  In this case we end up calculating how much of the interest should be reallocated and applied to the asset as principal, and this must be done individually for each payment received.  That reallocation is done with a GL entry and it leaves us with accurate interest income totals which agree with what the servicer reports on the 1099-INT, and correctly reduces the asset value in line with the amortization schedule in the partial contract.  (Sorry to geek out on you there but, for some reason I find this stuff interesting.)

@Chad U.

Discounted notes are extremely complex crm

An accounting standpoint and like any type of accounting, there are GAAP which the way one accountant does things may be slightly different than another, but if you want some reading that will blow your mind read about buying a discounted note and trying to figure out what is earned income vs capital gains.