I purchased a property tax lien at auction. I paid a premium for it. The debtor has the right to pay the debt in full at any time. (S)he does not have to repay my premium. When redeemed, it seems I should have an expense for the premium and income for the interest received. IRS instructions for this seem arbitrary and confusing. I think I can: report this as a sole proprietorship where the premium is an expense and the interest is income (problem is that I get charged self employment taxes on any profits); OR report each lien separately with the interest being regular income and the lost premium being taxed as a capital loss (at a lower tax rate than the interest); OR elect to amortize the premium over some period and have that reduce the interest. Can I do this last with liens for which the holding period is variable at the debtor's option? If I can do this, what period should I be using for the amortization? Finally, how would this get reported in Turbo-Tax? Thanks!
