Level 5

Note bought at a discount

Forum|Forum|5 years ago
March 6, 2021
1 reply
19 views

I have a situation where a client bought a discounted note from the bank 4 years ago at $240,000 and this and he has been collecting interest on the note for 4 years. Now the note becomes due and he will get $290,000. Is this a capital gain item or an ordinary income item for the difference in the basis and sale price. They are in the business of financing and investing. I would like to know what the community thinks about this.

This topic has been closed for replies.

itonewbie

Level 15

Is $290k the par value? If it's discounted, your client was probably not "collecting" but "accruing" interest. That'd be my first impression based on the limited info you provided.

---------------------------------------------------------------------------------Still an AllStar

J

jskouberdisAuthor

Level 5

No they were collecting interest at 7% for the last four years. And will receive $40,000 more upon redemption next year. My question is that a long term capital gain or ordinary income. And if ordinary income is it interest income or financing income

itonewbie

Level 15

That's an original issue or bought from the open market? $240k sounds too clean for it to have been bought from the market. Is there any reason why the note was sold at a discount but still paid interest periodically?

---------------------------------------------------------------------------------Still an AllStar

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