Cost Basis

Cost Basis — when a note investor purchases a mortgage note, the cost basis includes more than just the price paid to the seller. Legal fees, due diligence costs, recording fees, and any other expenses directly tied to the acquisition are factored in. This total figure becomes the benchmark against which all future returns are measured.

Accurately tracking cost basis is essential for both investment analysis and tax reporting. When a note resolves — whether through full payoff, discounted payoff, foreclosure, or resale — the investor's gain or loss is the difference between the resolution proceeds and the cost basis. Notes purchased at a steep discount to unpaid principal balance will have a lower cost basis, which can translate into stronger returns even if the borrower pays less than the full amount owed.