Using Promissory Notes \u2013 What is the Tax Perspective?

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Using Promissory Notes – What is the Tax Perspective?

Posted By Carl Glendon     April 24, 2022    


Are you thinking about the use of promissory notes in case of a property purchase? If you are considering doing so, you are not alone. There is a widespread use of promissory note in New Jersey for property purchase matters. Whenever there is a shortage of cash, immediately such kinds of notes are handed over to sellers of properties, with the assurance of payment within a certain amount of time and possibly on a specific date. Are you wondering about the tax perspective of promissory notes? Read and find out!

Using Promissory Notes – What is the Tax Perspective?

From the point of view of a home owner who wishes to sell his property, the composition of this kind of note has considerable importance. From a tax perspective, it is better to get a higher amount of sales price for a property and charge a lower interest rate to the buyer.

In this manner, on the sale of a house, the capital gains will be free of taxes although the interest on the promissory note will be taxable.

On the other hand, for a purchase, a high rate of interest and low sales price are better due to the fact that these can help in writing off the interest amount. Also, after making payments to the seller faithfully for 1 year or more, it is possible to refinance at a lower rate of interest from a bank via a traditional mortgage.

However, with the purchaser having built up enough equity in the home, he will possibly not have any problem in acquiring funding from the bank for its purchase. You can find free simple printable promissory note templates on various websites where legal forms and templates are available for download, to customize and use for specific purposes.

It is important to keep in mind that promissory notes are different from the mortgages in various ways. In some cases, where a third party works as the creditor rather than the seller (as in case of a take-back mortgage), matters can get more complicated and in case of a default, there can be risks of legal issues.