What Investors Should Know About the Tax Implications of Investing in Notes

by Dave Van Horn

Oftentimes when I’m asked about tax implications of investing in notes, I have to state that I’m not a CPA and that I’m not trying to give anyone accounting advice. But it is a common question that note newbies ask, as they like to compare it to other types of investments, such as real estate or stocks.

Investing in a Note Fund

Most of the time when investing in a note fund, you’re investing in shares of an LLC (Limited Liability Company). Usually, this is taking place inside a private placement and is open to accredited (or high net worth) individuals and on occasion up to 35 “sophisticated investors” who still meet certain net worth and investment knowledge requirements. In these situations, the investor is usually investing at least a minimum amount (whatever that fund minimum is) for a certain period of time until maturity, per the private placement documents (PPM–Private Placement Memorandum).

The good news is that your liability and your overall exposure is limited to the amount of money invested. You also get to share in overall fund expenses. In some funds (like PPR’s note funds, for example), you can even redeem shares to purchase notes upon availability. The other good news is that you can spread your risk around multiple notes, as opposed to an individual asset.

If you have one note and it goes bad, you have a 100% default rate, but if you have a hundred notes and one note defaults, you have a 1% default rate.

From a tax perspective, when investing in a note fund as part of private placement, you should receive a K-1 at the end of the year, and in most circumstances those payments of return on your investment are taxed as “Ordinary Income.”

Investing in Individual Notes

When investing in an actual note that’s performing (or in other words, the borrower is current), most payments are part principal and part interest. The principal portion is really just a return of capital, and the interest portion is taxed as “Interest Income.” Usually your servicer will send you a 1099-INT, just as they should send a 1098 to the borrower as well.

Depending on how long an investor owns an individual note and when he/she were to exit said deal, either by selling the note or cashing out in some way (for example, with a borrower refinance), the investor is taxed as either a short-term or long-term capital gain depending on if they had owned the asset for more than a year and a day.

Unless you own the note in a tax-free or tax-deferred structure such as a self-directed IRA account, there are really no tax advantages like there is with depreciation when owning real estate.

It’s similar with appreciation as well, since there’s no real, true appreciation while owning a note. The only way the amount that’s owed can increase is if the borrower had missed payments where interest and penalties were to continue accruing.
There may be instances of “phantom appreciation,” which can exist in a situation where a note was purchased at a discount because it had limited or partial equity, and due to improvements in the real estate market, the real estate values on the collateral behind a note increased, thus making the value of the note increase as well.

Now that you know some of the tax implications of owning notes and mortgages, it’s easy to determine that it’s still a relatively passive form of income, and it’s taxed more favorably than earned income. I’d much rather be taxed like interest on a bank account than taxed like I am at my day job.

Notes are just another tool that can be utilized on the road to financial freedom.

Have any questions? What is your experience in real estate notes and taxes?

Leave your comments below!

Interested in Finding out More? Reach out below

Shawn Ireland

Phone: 913-225-6231

Email: Ireland_Investments@yahoo.com

Address: 1415 Main St. #823, Grandview, MO 64030


Website: www.irelandinvestmentsllc.com/

Facebook: @IrelandInvestmentsLLC/

Instagram: @irelandinvestmentsllc

Twitter: @IrelandLlc


Ireland Investments llc

This information is intended only for the use of the intended recipient(s) and it may be privileged and confidential. Please note that any views or opinions presented in this post are solely those of the author and do not necessarily represent those of the company. This is reposted information and is not original thought of Ireland Investments or anyone associated with the business.

Popular areas we service;


Kansas city Missouri, Overland Park Kansas, Kansas city Kansas, Olathe Kansas, Independence Missouri, Shawnee Kansas, Blue Springs Missouri, Lenexa Kansas, Leavenworth, Kansas, Leawood Kansas, Liberty Missouri, Raytown Missouri, Gladstone Missouri, Grandview Missouri, Belton Missouri, Prairie Village Kansas, Gardner Kansas, Raymore Missouri, Grain Valley Missouri, Ottawa, Kansas, Lansing Kansas, Excelsior Springs Missouri, Merriam Kansas, Harrisonville Missouri, Cameron Missouri, Mission Kansas, Kearney Missouri, Smithville Missouri, Pleasant Hill Missouri, Oak Grove Missouri, Bonner Springs Kansas, Roeland Park Kansas, Parkville Missouri, De Soto Kansas, Richmond Missouri, Greenwood Missouri, Paola Kansas, Basehor Kansas, Tonganoxie Kansas, Odessa Missouri, Peculiar Missouri, Platte City, Missouri, Higginsville Missouri, Lexington Missouri, Edwardsville Kansas, North Kansas City Missouri, Osawatomie Kansas, Louisburg Kansas, Fairway Kansas, Mission Hills Kansas, Sugar Creek Missouri, Riverside Missouri, Buckner Missouri, Pleasant Valley Missouri, Lawson Missouri, Plattsburg Missouri, Lake Lotawana Missouri, Weatherby Lake Missouri, Wellsville Kansas, Edgerton Kansas, Westwood Kansas, Garden City Missouri, Gower Missouri, Claycomo Missouri, Lone Jack Missouri, Drexel Missouri, Lake Tapawingo Missouri, Glenaire Missouri, Dearborn Missouri, Avondale Missouri, Osborn Missouri, Sibley Missouri, Oaks Missouri, Unity Village Missouri, Levasy Missouri, Randolf Missouri, River Bend Missouri, Jackson County Missouri, Johnson County Kansas, Clay County Missouri, Wyandotte County Kansas, Cass County Missouri, Platte County Missouri, Leavenworth County Kansas, Miami county Kansas, Lafayette County Missouri, Ray County Missouri, Clinton County Missouri, Bates County Missouri, Linn County Kansas, Caldwell County Missouri, Crossroads Real estate, 18th and vine Real estate, Hospital Hill real estate, library district real estate, longfellow real estate, dutch hill real estate, quality hill real estate, river market real estate union hill real estate, Greater downtown KCMO real estate, East Side KCMO real estate, Midtown KCMO real estate, Westport Real estate, Hyde Park real estate, Northeast KCMO real estate, Northland real estate, Plaza Real estate, South Kansas City Real estate, Fairway Kansas real estate, Kansas city Kansas real estate, lake quivira Kansas real estate, Lenexa Kansas real estate, Mission hills Kansas real estate, overland park Kansas real estate, prairie village Kansas real estate, Shawnee Kansas real estate, weatherby lake Missouri real estate, westwood Kansas real estate

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

WordPress.com.

Up ↑

%d bloggers like this: