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Old 02-09-2015, 03:48 PM
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When to claim personal loan interest as income?

7 years ago I loaned a sum of money greater than $10k.
I received a promissory note, with 5% interest, and a 5-year repayment schedule.
No payments were never made, however after 7 years, I may be finally receiving a partial payment on the note.

When am I obligated to report interest income on this? If I do need to report a portion of it as interest income then how do I calculate what portion of the payment is interest, if there is no payment schedule being followed?
If the remaining loan principal is never paid in full, and this gets written off as bad debt, then in my estimation, I never earned any interest.


Thanks!



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Old 02-10-2015, 12:21 AM
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When am I obligated to report interest income on this? =========>>>>when you actually receive it as cash basis taxpayer;most taxpayers are cash basis tax payers.

If I do need to report a portion of it as interest income then how do I calculate what portion of the payment is interest, if there is no payment schedule being followed?======>>it depends;aslongas you receive only interest without principal, then it is interest income; if you receive both interest and principal, then you need to report only interest portion of the payment. A contract between you and the borrower should be specific as to its terms, including whether the interest started accruing at the time of the original loan or whether it is to start accruing upon the date of execution of the new agreement.
If the remaining loan principal is never paid in full, and this gets written off as bad debt, then in my estimation, I never earned any interest.====>>>>You still need to report interests received on your return as taxable income; however, There are different tax rules for "non-business" bad debts;ones that don’t qualify as business expenses. A bad debt in your personal life can still produce a tax benefit, but under the much more restrictive short-term capital loss rules for individuals. Generally, this means that a bad debt can be claimed on your personal tax return first to offset any capital gains on investments—and then up to another $3k max to offset your "ordinary" income from earnings.



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