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Individual made a (second) mortgage loan to another. The loan has been in default for many years. The bank (first mortgage holder) foreclosed on the property. The individual lender received a partial lump sum payment of $20K. The total loan amount was roughly $280K of which $150K was principal and accrued interest was $130K.

Is any of the $20K received taxable interest income?

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    Has any of the accrued interest been recorded as interest yet? This will likely change how that 20k is treated. Aside from the 20k received, there's a good chance the person who leant the 280k gets to take a bad debt tax writeoff for the amount not yet received. This will depend on your jurisdiction - where are you located? – Grade 'Eh' Bacon Oct 25 '17 at 12:28
  • It is unclear on sequence of events. Person A, purchased a property for 150K [or was it more?] and secured a mortgage from Bank B. No repayments were made by Person A to Bank B. The loan accrued to 280K [150K principal plus 130K interest]. Bank B foreclosed on property. This means the property was sold for X amount by Bank to whom? [Individual A or C]. If so it is not clear how Individual C lent to A? OR are you saying; Bank B lent primary mortgage to Individual A; Individual C made additional mortgage to A. What was this amount? – Dheer Oct 25 '17 at 12:54

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