I purchased a property tax lien for a premium. It was redeemed and I have a loss for the premium I paid and a gain for the interest. How should these be reported?

[t_square74]

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!

[Anita01]

If the property owner has repaid the lien, minus your premium, you would enter this as an investment sale, with a category of other.  Holding period would be the length of time you held the lien.  The interest would be claimed as interest income under that section of the program. You can just say it was reported on a 1099-INT, it doesn't matter.  The interest u pay tax on, whether when the lien is redeemed or you receive it on an annual basis, is added to the cost basis of your lien purchase.  If the premium is not repaid, you could claim it as a selling cost, since it's included in your cost  basis.

[Blue Lake Properties]

How do you handle the premium bid when you just purchased that Tax Lien?  Can it be claimed as an expense in the year it was purchased or do you have to wait until it is redeemed or you acquire the property before you do anything?  This is for multi member LLC.

[DianeW777]

Tax lien purchases, including the cost of the premium bid, will be treated like investment sales in TurboTax.  See the details below and please update if you need further assistance.

1. If the property owner has repaid the lien, minus your premium, you would enter this as an investment sale, with a category of other. 
2. Holding period would be the length of time you held the lien.  (long term or short term)
3. The interest, if applicable,  would be claimed as interest income under that section of the program. 
   • You can just say it was reported on a 1099-INT, it doesn't matter.  The interest you pay tax on, whether when the lien is redeemed or you receive it on an annual basis, is added to the cost basis of your lien purchase.  If the premium is not repaid, you could claim it as a selling cost, since it's included in your cost  basis.

You will report that in the same section that you report stock and other investment sales. 

@Blue Lake Properties

[Blue Lake Properties]

I just purchased the Tax Lien in December and it HAS NOT REDEEMED.  Do I claim this as an expense for 2022.  Do I claim this as an expense in 2022?

[Vanessa A]

No, if it has not been redeemed, you will not claim it as an expense until it is redeemed.  Investment expenses are not claimed until the investment is disposed of. 

[Blue Lake Properties]

Thank you very much Venessa A!  I really appreciate it.  Have a great day.