Tax Treatment of Performing vs Non-Performing Notes

Not all notes are taxed the same and how you account for them can make a big difference.

Performing Notes:

Predictable interest income

Usually taxed as ordinary income

Timing depends on whether you use cash or accrual accounting

Non-Performing Notes:

Income arises when a note is resolved, foreclosure, modification, or sale

Gains may be ordinary income or capital gains depending on structure

Cash vs accrual method affects when and how income is recognized

Your strategy and accounting method directly affect your tax outcome. Same note, very different results depending on structure and method.

💬 Question for the group:

Are you currently tracking your notes on cash or accrual basis, and has it impacted your taxes yet?

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Tax Treatment of Performing vs Non-Performing Notes

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