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Tax decuctible interest, unsecured note.

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This topic contains 21 replies, has 0 voices, and was last updated by Avatar of anonymous anonymous 15 years, 6 months ago.

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  • #53
    Avatar of anonymous


    Please pardon my gullibility , but…

    In a recent Q & A article by Bob Bruss, Mr. Bruss wrote in re. to a privately held second note: “If it is an unsecured promissory note, the interest you pay is not tax-deductible.”

    This doesn’t necessarily apply to the unsecured promissory note that may be carried by the settlor in a PACTrust; correct? ie. If an unsecured promissory note was created within the PACTrust and paid by the RB, then the interest is (may be) deductible by the RB, right?

    Thank you


    Avatar of bill_gatten


    Mr Bruss is correct in general.

    Avatar of bud_branstetter

    To me it seems conjecture as to what the question that Bruss was really asked. If it were a an unsecured note from the aspect of comsumer goods then interest is not deductable. If it were a loan for investment puposes then it is deductable.

    Avatar of anonymous


    In Mr. Bruss’s case, he was referring to a mortgage/trust deed and promissory note. I wanted to make sure his broad statement didn’t necessarily apply, which I didn’t think it did since it is open to interpretation.

    It would be secured by the borrowers beneficial interest.

    So now the next question is: Does it need to be recorded or perfected with a UCC-1? Or, can it remain a private agreement within the confines of the trust and still be deductible? And, would that be a wise choice not to record?

    What do you think?

    Thank you


    Avatar of bill_gatten

    In Re. to what Bud B. said, if there ever was to be a question of non-deductibilty re. an unsecured note for purchase money, any such note could certainly be secured by the by acquring party’s beneficiary interest in the trust (a collateral assignment with a U.C.C. filing).



    I decided to resurrect this old post because some of my student / partners were asking in our last Investment Association Meeting, “What do you do when the property you are making an offer on is owned free and clear”.

    The reason I brought this post back from the dead was to illustrate a point I made regarding the possible tax deductibility of an unsecured promissory note.

    Avatar of anonymous

    Thanks for the example Scott. Win/Win for everyone.

    What was the initial marketing offer to find the RB?

    Did you bump the MAV or do anything with the potential future appreciation?

    What did the RB pay upfront?

    So… to summarize…the seller effectively accepted 6% return on his equity, and the RB accepted around 8% to 9% interest on his payment based on the 154K MAV and current market rents; correct?

    Who pays tax and insurance, HOA, trustee etc?

    Is there any monthly principal reduction for the RB or did they choose interest only?

    Thank you

    Brian Mac


    I’m not sure what you mean by initial marketing offer.

    Avatar of anonymous

    That was the initial marketing offer for the resident beneficiary…I was fishing for what you did with the advertised value of the property.

    Does this mean the seller is getting the $154,000 less the $25,000 equity going to you? albeit in 5 years.

    And the appreciation? Is that split in any way?


    The Resident Beneficiary either came from an ad I ran in the For Sale By Owner Magazine, a flyer I placed in a grocery store or from a Lender that referred them.



    So at the end of 5 years, assume the property is appraised at $200,000.

    I am trying to understand how the money is settled.

    First, does the R/B purchases the home from the trust for $160,000 or $200,000?


    In 5 years the property is worth (by appraisal) $200,000.

    The R/B buys by refinancing the property at the appraised value.

    The first person paid is the Settlor in this case because there is no Mortgage per se.



    That really helped.

    My last question is, at the inception of the trust, the R/B contributed $11,500, of which around $5,000 was left over after trust and impound.

    Is this $5,000 required to be left in some impound or security account in case of default?


    I deposit those funds directly into HIP National Bank.

    Avatar of smiley


    I thought the longest term of lease was 2 years, 11 months, and 29 days without triggering the dos. I understand that land trusts can run 21 years and that after the the “3 yr lease” is up you can go on a day-to-day hold over, however, if it (5 yr. lease) was specified at inception wouldn`t that put you in a compromising position out of the gate? Also, in your 1st post on this thread you said the owner would receive $202,000 for a $154,000 house. Then, in your (2nd to last) post you say the owner gets $129,000 ($154,000 – $25,000 buy down) + $48,000 ($800 x 60 mos) for a total of $177,000 . Was the $202,000 a typo or am I just a boob that is missing something?
    Personally, I like the $177,000 scenario better. Also, I want to thank you and all NARS members who take the time to post here. This forum is awesome!!!

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