I was a lien holder on my brother’s home. I was paid 37,000 after He sold his home. I’m not on the mortgage or title. Do I pay taxes on this?

[rnewton36317]

My brother owed this debt. I am not on the mortgage or title. It was an official lien. I had to hire an attorney. I just received a check after the house was sold.

[ee-ea]

What caused you to have the debt/lien in the first place?

[Opus 17]

It sounds like your brother owed you money.  Your brother sold the home, and paid you what he owed you (although perhaps by legal force instead of voluntarily).

In that case, the sale of the home has nothing to do with you, and the repayment of the debt is only taxable if it is more than he borrowed (if you loan money, interest you receive is taxable but repayment of the principal is not).  However, we don't know all the facts, and I might have made some incorrect assumptions.

Also, if you did loan money to your brother, you might be required to report and pay taxes on interest that you should have received, even if you didn't charge interest.  This is called "imputed interest" and is a bit complicated.  I'm not sure if we need to go down that rabbit hole or not. 

[DMarkM1]

I'll also add that if the lien was for money owed for services you performed or products you sold then that would be income to you as well.  You would be able to deduct expenses from that income as well.  All would typically be reported on a Schedule C.

[rnewton36317]

It was not for services. It was just money he owed me.  He became very careless with his money management and his credit score tanked so low. Selling his home was the only way for me to get paid back. I did end up hiring an attorney and my brother signed a lien agreement, making it an official lien filed with the town, on his home in the amount of 37,000. he sold his home and the closing attorney sent me a check. I just did not know if I would receive a 1099S. This wasn’t even the full amount of what he truly owed but I agreed to settle because he ended up selling  his house for less than what it was worth and I’m just tired of fighting. Was never any interest on the money. It was just a flat number owed. I’ve never been in a situation like this. Glad I was paid back but nonetheless I don’t need to have any tax bill surprises in the near future. 

[rnewton36317]

My brother owed me money. he was terrible at money management. His credit score dropped. I had to end up hiring an attorney, and he signed off on a lien agreement that was filed with the town. I don’t even think he trusted himself paying me back that’s why he went to this degree to settle everything once and for all, he is in debt up to his ears so he did not have the funds to satisfy what he owed me. I appreciate being paid back, but I don’t know if I have to pay taxes on this since I was given a check by a closing attorney, I don’t even know if I’m gonna get a 1099S . It was just a flat number there was never any interest that I charged him. 

[Vanessa A · Accepted solution]

No, you should not get a 1099-S.  The 1099-S, is for the person that owns the house.  Having a lien on the house does not make you owner of the house, it just means you have a claim the the money in the house.  The 1099-S will go to your brother.

Since it sounds like this was a repayment of a loan without interest, and had nothing to do with work you performed or services offered, you will not have any tax consequences or reporting requirements for the loan that was paid back to you.  

[BD88]

I was in a similar situation, except when my family paid me back the amount due for the lien, it was with interest as per our agreement. As I understand it, I have to report this interest. How do I go about doing this?

[Vanessa A]

Yes, the interest is taxable income. You can enter it by selecting the following:

1. Federal
2. Income
3. Show more next to Interest and Dividends
4. Start next to interest on 1099-INT
    

You do not have to have the 1099-INT to claim it, all you will need is the payors Social security number and the amount they paid.
 

[BD88]

I held the lien on the house since 2011, well over a decade. Is there any way to claim the interest as a long-term capital gain, in order to get a more favorable tax rate of 15% (which would align with my income bracket)? It seems that claiming it as regular interest would be more of a short-term gain, and therefore make it subject to a higher tax rate, like regular income. And thank you for your previous response!

[Vanessa A]

No.  Interest is always treated as interest income which is taxed as ordinary income rates, unless it is excludable interest which this would not be. 

How was the interest paid?  Was it paid over the years or one lump sum?

If it was paid over the years, it should have been claimed on each year's taxes as it was received. In this situation, you would need to Amend Your Return to claim the interest in the years it was paid.  You would not include it all on this years tax return. 

 

[BD88]

The interest was paid in one lump sum after the sale of the house last year.

[KrisD15]

Since it was all paid in 2024, you will need to report that total amount as interest income for 2024.

There is no averaging methods for interest income.

Be sure you separate interest from the principal balance. Only the interest is taxable. 

IRS link for Interest Income.