TP purchases raw land ten years ago for total 1.7 M cash. TP name and an unrelated friend listed on title. Friend had no cash but gave a 5pct long term note that was recorded. Over the years TP put in another 500k for entitlements, prop taxes. Never got the entitlements because of open space laws etc.
The friend kept giving new notes each year for half of the cash put in by TP that year.
No payments of any kind made by friend.
Prop for sale now. One offer for 1.9Mill which is 300k less than TP's cash investment.
The friend is broke.
TP is generous person and willing to tear up the notes and friend will quit claim friend's half to TP.
Accrued interest maybe 500k
Can you see the IRS imputing interest income to the TP in this situation?
Then TP would get a short term cap loss = imputed interest? TP has lots of ltcg's