“A friend who has loaned money in the past (all documented, of course) has some stagnant investments and wants to loan me 100k at 6% to buy a condo. I will pay him a mortgage as my bank over the next 20 years. However, if he sells this stock or cashes in his IRA he thinks that he has to pay 22% since it will count as income for the year. Is this true?”---->In general yes; he is correct. An early withdrawal (that is, money taken out before age 59½) from an IRA is subject to a 10-percent penalty in addition to income tax due on the withdrawal. hOwever,if he cashes in his IRA after he has met the requirements in section 1, his distribution is considered qualified so he does not have to worry about paying any penalties. However, he may have to pay taxes on the withdrawal depending on the type of account he has. Traditional IRA distributions are taxable, so he must include that amount in his taxable income for the year. His traditional individual retirement account ,IRA, is a savings account that provides tax advantages for retirement savings. Account deposits aren't taxable until the money is distributed. Money can be withdrawn, without penalty, after the age of 59 ½. If an IRA is "cashed out" before this point, it may be subject to penalties, according to the IRS. If he withdraw money from his IRA before he meets the requirements in section 1, he will have to pay a 10 percent penalty on the amount withdrawn in addition to any taxes he owes. This 10 percent penalty only applies to the taxable amount of the withdrawal. For traditional IRAs, the entire distribution is taxable, so he must pay taxes on the entire amount. For example, if he had $25,000 in his account - $19,000 of contributions and $6,000 of earnings - he could withdraw the $19,000 at any time, tax-free and penalty-free. However, if he withdraws the earnings before meeting the criteria in section 1, he would have to include that amount on his taxes and pay a 10 percent penalty. The IRS does recognize a limited number of special cases that allows him to withdraw his money from his IRA before achieving the criteria in section 1. These exceptions include if he becomes permanently disabled, has medical bills that exceed 7.5 percent of his adjusted gross income, or ETC. Also though he may not report the individual retirement account withdrawal on his tax return, but the IRA custodian may report to the IRS. Then the IRS’d recalculate his tax and is billing him for additional tax, penalties and interest. Selling 100K stocks or a pricate loan is diffferenct story UNLESS he owns the stocks less than one year; this means that capital gain income earned from selling his stocks held one year or less is taxed at the ordinary income tax rates in effect for the year, ranging from 10% to 35%.; for example, if his tax bracket is 28% , then he needs to pay tax(28%) on his STCG; STCG is treated as ordinary income, NOT capital gain. However, if he owns the stocks for more than on eyear, then his marginal tax trate is 15% or lower than 15%, then he DOESN’T pay any LTCG tax. If his tax bracket is higher than 15%, then he MUST pay LTCG Tax, 15%, on the LTCG. Please visit the Webpage here: Capital gains tax in the United States - Wikipedia, the free encyclopedia
“Since he is immediately reinvesting in me, a private borrower, is there a way for him to avoid this ridiculously large tax.”--->As said above; it depends on the sitatuion. “ Especially since he will have to pay income tax on my payments to him. It would be a solid investment for him and a big help to me. The condo will remain in his name until paid, much like the bank owns the deed until the mortgage is paid off”---->I guess so and correct. It doesn’t matter whether the condo will remain under his ownership.It depends on the situation that he faces.