Repayment of a loan from a relative

snipped-for-privacy@yahoo.com posted:

Assuming you're like the vast majority of 1040 filers, and you report income on a cash basis -- meaning you haven't accrued any interest which you reported over the years -- it would seem to be an _open and shut_ case for "Return of Principal." If -- and it would seem to be a big "If" -- the interest is ever paid, then you could report that on Schedule B. So IMO, you should report the "income" on Schedule D, as repayment of a loan with the 2001 date of investment shown and the appropriate 2006 date of repayment, "Proceeds" and "Cost Basis" would _both_ be reported as $40,000. Bill

Well, we happen to have one of the best moderators on the net. But please don't tell him that! We don't want him to get a bigger head than he has already.

I'll leave the definitive answer to those who actually do returns. But it seems to me that if you are a cash basis taxpayer you recognize only the interest you received in the year it was received. Repayments of principal are not taxable. The glitch, I would guess, is whether a payment of principal but not interest due might be considered in whole or in part deemed interest. Stu

You don't, and the amount of forgiven interest isn't enough to trigger gift tax concerns by itself.

-- Phil Marti Clarksburg, MD

Yes, it is.

It is still always nice to hear again. The real thanks go to Dick Adams and the more devoted regulars who incur real opportunity costs by answering questions.

There is nothing to report. Keep that "little document" as well as a copy of the receipt you sent to your cousin in case the IRS audits you someday.

I do hope it's a fun trip out of the country and not one where you're being shot at.

The repayment of the prinicpal of the note presents no tax issue. It is repayment of principal. Just keep the note in your files & make sure to note the payoff date. However, the forgone interest is another matter. There are the imputed interest rules for you to address. If interest was not paid, you have to impute it & include it in your income. Then, you gift away the interest amount. So long as its under the annual gift tax exclusion, there is no gift tax issue. You just get stuck absorbing the interest income with no cash received for it. ___________________________________

-----> real address on hobokeni or hobokenx

If the loan was non-deductible in the first place, the repayment is not taxable or reportable. I don't think there is any way the loss of interest can be deducted unless you want to sue, get a court judgement and claim a non-business bad debt. Nan, EA in LA

The return of principle is not considered taxable income. The interest payments, if they had been made, would have been taxable.

But if he's a cash basis taxpayer and didn't foregive the interest, isn't it just a bad debt he owns (which isn't deductible because there's no basis in it)? When/if the interest gets paid, it's then taxable. Seth

You should research the imputed interest rules they do apply to cash basis taxpayers ___________________________________

-----> real address on hobokeni or hobokenx

That's if I make a loan without requiring interest, the IRS will impute it. What if I make a loan whose terms require interest at an acceptable rate, but the other party just doesn't pay? Or would (say) $2,000 of the $20,000 payment be considered interest, the rest principal, and he has a bad debt loss of $2,000 of principal? Seth