Should this money be taxed in an owner-financing deal?

[John Reid]

I'm not sure if taxes will be owed on this amount of money or not. Here is some background. I work with 3 partners. Our LLC worked out an owner-financing deal with an out of state homeowner for a local property. We have title and control the property. All we do is pay him $272 a month per our legal agreement. The term is for 10 years 6.5% interest, owe about 21K as of right now, been paying him for about a year and a half.

Today we mailed the previous owner a letter asking if he would take a lump some amount of 15K cash now to release the lien and consider it paid. We dangled this carrot to see if he bites--maybe he won't but we don't know yet. This could be a very good thing for him as a person can do a lot more with 15K in the pocket now vs $272 a month for 10 years. This could end up saving us about 6K plus 8and a half more years of interest. Everyone wins in this situation.

My question is this: Does our LLC owe income tax (or any other tax for that matter) on the difference between the original agreed on princpal amount and what he agrees to take? The 6K difference could be treated as extra income in the eyes of the IRS--we think. And what about the previous owner? He would have to pay tax on the 15K now but that would be less tax in the long run than $272 a month for many more years--right? Our real estate attorney said the question was out of her field of experience and suggested we contact a CPA. I just wanted to see what you guys thought. If it is taxable do we just add it into the mix when we do our yearly taxes?

Thanks!