Taxpayer lent $600k to a real estate development project for a $1 million note secured by the property.
The note is 2% interest only during construction and $1 million balloon payment due on on the close of escrow when the property is sold. The project will take about 18 months to complete.
Will $400k profit he'll make be all interest income recognized in the year received or is there a capital gain component? ($1 million balloon payment minus $600k original loan = $400k profit)