All Forum Posts by: Carlos Little

Ahhhhh! Now we're getting somewhere. This may be the strategy I was looking for.

So you're saying as long as the client does not fully modify the note at once, but simply "rewards" the homeowner with principal forgiveness for paying regularly and consistently, we could possibly avoid the full inclusion as long as we don't make a substantial change to the originally issued note.

In your opinion would you think they could repeatedly inch the principal down just under the 5% threshold each year to avoid it being "substantial", or is the 5% the maximum total changes to the original note. I know there are other changes that cannot be over a certain amount either (interest, term, etc.). I can research this if you don't know off the top of your head.

Thanks Steve, this is getting good.

Thanks for your input @Steven Hamilton II . I will get more information from the client as to the time left on the note prior to modification.

It looks like my thinking was not too far off the mark. I just had not considered the fact that the modification itself is considered a sale and therefore recognized at that point.

Also, I have to check into the fact that we are picking up the note at a substantial discount from it's initial face value. In your experience has this issue (OID) been a reason for recognizing the full discount amount as income upon acquisition of the note?

Please let me know if I'm off the mark on anything.

Thanks again everyone.

Bill I agree, it's good to have a tax liability. My client and I just are trying to limit having to pay a large amount of taxes on something that we have not "constructively received".

I really appreciate your help. I may hit Steve up separately as well once I get more specific facts.

Thank you Bill for the information and example.

I'm guessing the actual modification creates an event which effectively is a sale of an asset (previous note) in to a new one. This is what requires the immediate posting of the actual gain. Does that sound right?

I also appreciate the advice about licensing, etc. That makes good sense.

Thank you Ellis. This link you provided is exactly what I was looking at along with similar info that caused me to rethink my previous thoughts on how/if I would incur a immediately taxable event. Thanks again.

I guess I'm trying to see how to limit my exposure to something like this.

Hello everyone,

I am about to begin investing in notes myself, but I have a conflicting question posed by a client of mine who also invests in non-performing notes.

How do you report any gain from these notes on your tax return?

As a simple scenario, let's say I purchase a note with a original face value of $100K for $20K. I understand my basis is now $20K. If I work out an agreement with the homeowner to modify the note to receive payments over 30yrs or $80K (principle), how much do I report as income this year?

My experience tells me that I must compute the gain (%) and report that percentage of the principle as a taxable gain + the interest received AS I RECEIVE IT IN PAYMENTS each year.

I keep hearing from other sources that we must include the entire projected gain as income (all at once) in the year we made the modification to the note. Thereby reporting approximately $60K income + interest immediately thus creating a "phantom income" issue.

It seems crazy to think that I would be taxed and accordingly penalized for picking up well over $60K in income when I haven't received a fraction of it. I wouldn't be able to pay the taxes on cash that I haven't received.

What has been your experiences with this?

Am I missing something or are they?

Thanks for the information or insight. I'm sure this affects everyone here on this forum.

Carlos

Welcome aboard Brandon!

Like yourself, I'm about to fire up my investing activities again. I'm glad to see more fellow investors here in SE Michigan to network with.

I'm sure you'll find the information found here useful.

Thanks Joshua.
This is great information to help tie up the loose ends and protect BOTH sides of the transaction.