Tom: I am going to purchase a $10,000 note payable @ 7% monthly for 120 months for $7000. Not bad as is, as it gives me a return of approx 16%. I have contacted the payor and lo and behold, he has agreed to double his payments if I cut his interest rate in half. This will jump my return to over 23%. I pretty well know my tax implications, but what about the payor?
Les replies: very interesting. I would guess that your interest is taxable on your sch B. However, your interest and the payor interest would be DIFFERENT.
Everyone’s interest should be what you get or pay.
Remember that the seller of the note, sold at a loss.
So that is why the interest will not match up. Very interesting. Be interested what your cpa says.
Tom: Is there an interest rate that the IRS will impute an interest if the IRS does not like the one charged?
Les: I don’t believe you have an imputed problem. If anything you are getting lots. Imputed occurs when the interest is too low like 1%, not 7%. Hey, just noticed you wrote 7% monthly!? What the heck terminology is that. I might have your whole problem wrong. I initially read it as 7%, with monthly payments. What is the interest on the note in the eyes of the payor?
Posted by Tom Henderson on August 12, 2002 at 19:33:39:
I should know the answer to this one, but I have been out of the note business for a while and not sure of current IRS regs. I am going to purchase a $10,000 note payable @ 7% monthly for 120 months for $7000. Not bad as is, as it gives me a return of approx 16%. I have contacted the payor and lo and behold, he has agreed to double his payments if I cut his interest rate in half. This will jump my return to over 23%. I pretty well know my tax implications, but what about the payor?
Is there an interest rate that the IRS will impute an interest if the IRS does not like the one charged? The same question for notes taken back on real estate. A long time ago, if at least 9% interest was not charged, the IRS would impute 10%. (Is this showing how long I have been out of the business)My accountant is out of town and I was curious if any of you knew the IRS regs on imputed interest. What would they do, for example, if I sold a piece of property or restructured a note that had say 0% interest. At what point does the taxman start vomiting and saying “no dice”.
Tom: $10,000 note payable @ 7% monthly for 120 months for $7000
Les: okay, that must mean 7% note with monthly payments. Thought maybe you meant 7% of the $10,000 is the monthly, like a neg am loan.
I verified it with calculating your return. does go to 16%, however if he double the payment my initial calculations go to 26.40%.
7%, I doubt seriously the payor has to worry about imputed. Not with fix rates in the market place below that. How can an irs agent make that fly. Just save some loan rate adds for your files. As for you, I again doubt imputed has no concerns as well. You will be paying plenty of taxes. (: