Tax Treatment of Gain from Discounted Note Purchase

[David Garcia]

I own a First Mortgage Real Estate Note with a face value of $90K. I paid $72K for the note, which has a balloon payment in 2 years. Does anyone know the tax implications, if any, when I realize the $18K gain from the discount on the Note? I have tried to research this in the IRS code and can’t seem to find anything that describes the treatment of this. Thank you in advance for your input.

[William D.]

I am not an accountant, but wouldn't your basis be your cost; thus your taxable gain be the sales price minus basis? Whether it is long term/short term and capital/ordinary would depend on your holding period and whether or not you are in the business of selling notes.