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Old 10-01-2016, 09:10 AM
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Real estate commercial promissory note and tax treatment

I have a single-member LLC, and I have provided financing to a corporation via a commercial revolving promissory note. The note is secured by a second mortgage in a single-family residential property that was purchased in 2015. Therefore, I now have an interest in the property.

Under the terms of the note, I will not receive any payments or interest. Instead, I will receive 20% of the net proceeds upon sale of the property, which will likely happen in 2017.

How is this 20% profit from sale treated for tax purposes?

Since the property was purchase over 1 year prior, do I receive the benefit of holding the property for more than 1 year and treat the income as capital gains (even though I obtain my interest in the property a few months before the sale)?

Or is it simply ordinary income (like interest received on a loan)?

Additionally, can I receive any of the deduction benefits of the property, such as depreciation, repair expenses, and so on?

Finally, if the property were rented instead of sold, and I am also entitled to 20% of the rental income, how is that income treated? As rental property income?



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