Seller Finance Mortgage Interest Income and Buyer Interest Deduction
When most homeowner’s purchase a home, they usually finance the purchase through a bank or mortgage company. However, some individuals purchase a home through owner financing. Just like making payments under a traditional mortgage, part of the payment under owner financing is interest and part of the payment is applied towards the principal. When it comes to reporting the principal and interest payments for taxes, there are several things to consider:
1. Both the seller and owner offering the financing should have an amortization schedule showing the principal and interest being applied to each payment.
2. Each taxpayer will need the other taxpayer’s social security number to report on the information correctly on the Form 1040 tax return and other schedules.
3. The seller should provide the buyer a 1098 which shows the amount of interest paid to the seller during the tax year.
4. The seller will need to complete the Installment Sale Form 6252, to allocate a percentage of the sale to cost and percentage of the sale to profit. Depending on whether this was the seller principal home will determine whether Schedule D will need to completed under the principal residence rules.
When it comes to completing the Form 1040, the seller will report the mortgage interest received from the buyer on Schedule B after completing the Installment Sale tax Form 6252.
The buyer will report the mortgage interest paid during the year on Schedule A (Itemized Deduction) if the buyer chooses to itemize.
Seller financing isn’t difficult; but, knowing where the income goes on the tax return can be depending on whether you are the seller or buyer. The buyer in an owner transaction only has one form to consider–Schedule A for the interest deduction. The seller has Form 6252 (Installment Sales), Schedule B (Interest and Dividends), and possibly Schedule D (Capital Gains and Losses).
Mortgages are not always paid to a mortgage company or bank–sometimes they are paid to an individual in an owner financing transaction.
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- CIRCULAR 230 DISCLOSURE "We are required by IRS Circular 230 to inform you that the advice contained herein (including all attachments) was not intended or written to be used for the purpose of avoiding any penalties that may be imposed under Federal tax law and cannot be used by you or any other taxpayer for the purpose of avoiding such penalties."