When is loan interest considered income?

[Paul Winka]

I do private lending. I have a primary borrower. When a transaction closes, the principal and the interest are rolled to another loan. Thus, I never touch any of the money. Is that interest considered income for tax purposes when I haven't "touched" it? 

[Basit Siddiqi]

@Paul Winka

The IRS has a terminology of "constructive receipt".

If you have the control or means to collect the principal and interest upon the close of a transaction - then you should report the interest income.

If the terms of the loan is lending $100,000 at 10% with interest and principal to be paid in 1 year. If you say something to your borrower like "hey it looks like your doing good flipping homes; hold the $110,000 and buy another property. Then I would say this is constructive receipt and you should report it as income.

However, if the transaction is something more negative and the borrower is not doing good and doesn't have the $110,000 to pay you and you are extending him additional time/credit in hopes of him turning things around - then yes I would argue that you wouldn't report income in this case.