Note investing tax question

12 Replies

Yes, the acquisition costs is an expense for you and the interest income is ordinary income providing that you are not acquiring notes in a tax-sheltered environment such as a self-directed IRA.

Cash = tax Liability

SDIRA- (depending on type of IRA) deferred profits no tax liability


I do not recommend ever investing in your personal name. Use a properly structured entity to try and avoid personal liability 

@Joshua Scott The purchase of the note is an investment, so you should show it on your balance sheet as an asset.  The payments you receive have two components, interest and principal.  The interest from the note is taxable income and you should show it on your income statement.  The principal you receive reduces your investment on the balance sheet, as it is a return of capital and not taxable.  

@Michelle Burdo , like Chris said, the interest income is taxed as ordinary income, so in an IRA its either tax deferred or tax free if under a Roth. I use my Solo 401K to participate in JVs and build the income tax free. FYI I use a personal property trust to take assignment/ownership of the note in the project.

Thanks for your question, Joshua, and for your answers, Chris, Bob and Bob. I'm a note newbie and the very important nformation I've learned from your posts is something I was unaware that I need to know but didn't know to ask. 

Should you want to delve into SDIRA details a good place to start is research one of the SDIRA companies.  I would suggest www.QuestIRA.com to start and you will find plenty of education for you to review.  There are other companies as well that can provide similar insight.