Contract for Deed

[fliszt]

My client sold his lake cabin on a 10 year contract for deed at 8% interest. He received a $2000 "downpayment" this month and the contract payments will begin in January 2009. Does the $2000 downpayment contain interest or is principle only? Does my client issue a 1099 for the principle received? and then next year issue a 1099-INT? I seem to remember a question something like this in the EA exam. I probably got it wrong back then too.
Thank you.

[erchess]

Installment Sale

Why isn't this a garden variety installment sale with every payment involving interest and principal? Does the contract or common law in your state specify that the initial payment is all principal? Either way the F 6252 is not a problem.

As to forms he owes the buyer I can't see the need for any except possibly a 1098. I know that private sellers often do not provide them and that is why Sch A makes allowance for an interest payer who didn't get one but I don't know when one is owed and when it is not.

[BOB W]

My client sold his lake cabin on a 10 year contract for deed at 8% interest. He received a $2000 "downpayment" this month and the contract payments will begin in January 2009. Does the $2000 downpayment contain interest or is principle only? Does my client issue a 1099 for the principle received? and then next year issue a 1099-INT? I seem to remember a question something like this in the EA exam. I probably got it wrong back then too.
Thank you.

The $2,000 down is principle only. At the time the down payment was made no interest had accrued.

[fliszt]

Sorry folks,

I meant issue a 1098 for principal received.
Thank you for reply.
Larry

[BOB W]

I meant issue a 1098 for principal received.
Thank you for reply.
Larry

Only when interest is paid based on an amortization of Interest and Principal schedule. Issue 1099INT.

[newbie]

I would agree with BobW, the $2000 is all principal. Unless you are in a trade or business you will not need to issue a 1098-INT. Unless, of course, there is something else that I am overlooking.

http://www.irs.gov/pub/irs-pdf/i1098.pdf

[JG EA]

My client sold his lake cabin on a 10 year contract for deed at 8% interest. He received a $2000 "downpayment" this month and the contract payments will begin in January 2009. Does the $2000 downpayment contain interest or is principle only? Does my client issue a 1099 for the principle received? and then next year issue a 1099-INT? I seem to remember a question something like this in the EA exam. I probably got it wrong back then too.
Thank you.

IRS instructions for Form 1098:

File this form if you are engaged in a trade or business and, in the course of such trade or business, you receive from an individual $600 or more of mortgage interest on any one mortgage during the calendar year. You are not required to file this form if the interest is not received in the course of your trade or business. For example, you hold the mortgage on your former personal residence. The buyer makes mortgage payments to you. You are not required to file Form 1098.

People not in a trade or business that sell to each other without an escrow company as the third party usually provide an amortization schedule that they both refer to at tax time and report the interest paid as a deduction for the buyer (if a home, etc.) and this is why the IRS had you put down the person's name, etc on the schedule B of the receiver. The receiver puts down the principal on Form 6252 which calculates the % of principal to report and puts down the interest on Schedule B at 100%.
Correct me if I am wrong but this is how I've been doing it for years.

[taxxcpa]

You are right

IRS instructions for Form 1098:


People not in a trade or business that sell to each other without an escrow company as the third party usually provide an amortization schedule that they both refer to at tax time and report the interest paid as a deduction for the buyer (if a home, etc.) and this is why the IRS had you put down the person's name, etc on the schedule B of the receiver. The receiver puts down the principal on Form 6252 which calculates the % of principal to report and puts down the interest on Schedule B at 100%.
Correct me if I am wrong but this is how I've been doing it for years.

You are right. I do it just as you describe.
I sold a house several years ago on a contract for sale and I report the buyer's name, SSN and address when I report the interest he pays on the note. I am not required to issue a 1098 since I am not in the mortgage or banking business. The house was a former residence, so there was no capital gain to report on the principal portion of his payments.
I've had clients who sold a rent house and file a Form 6252 to report the capital gain portion of the principal payments.