tax treatment of proceeds from sale of foreclosed property

[Laura Sacandy]

I have a tax question regarding tax year 2018: In March 2017, I made a $75K loan to an acquaintance that was secured by a SF rental property. We created a 10% interest balloon note with no payments due for eighteen months and so it fell due in September 2018. The borrower defaulted, and so I got the house through foreclosure on the courthouse steps in early November. The renters moved out shortly thereafter. I then listed the house with a real estate agent, the house went under contract and we closed on 12.28.18.

In addition to my principal loan amount of $75K, I paid about $3K in expenses between attorney fees, 2018 property taxes (because the borrower didn't pay the property taxes), and some other miscellaneous expenses. So I had a total of about $78K in the deal prior to closing on 12.28.18.  My proceeds at the 12.28.18 closing were $99.7K ($105K purchase price less $5,250 real estate broker commission).

My question: For tax purposes, is my net gain of approximately $21.7K considered a long-term gain (since all of this resulted from a loan made over one year ago) or a short-term gain (because the subsequent sale of the property would be treated as a completely separate transaction from the default of the loan)? Or, would my net gain be considered interest income? Or, if none of the above, then what?