If you sell your home and hold a note, what type of income must you report separately?

When selling your home and holding a note, you must report interest income separately. In this scenario, the note represents a loan, such as a promissory note, where the seller acts as the lender. As the holder of the note, you will receive interest payments over time, which is categorized as interest income.

Interest income is distinct from capital gains. Capital gains arise when you sell an asset, like your home, for more than what you paid for it. In such cases, any profit from the sale is typically treated as capital gains, but the interest earned on the note is an additional source of income that needs to be reported separately. This delineation helps the IRS understand the different streams of income you are receiving from the transaction.

Therefore, while capital gains are relevant to the overall sale, the specific requirement to report interest income separately refers to the payments received from the note you hold. Understanding the tax implications of different income types is crucial for accurate reporting and compliance with tax regulations.