Handling of sale of contract for deed

[thomtax]

I posted this earlier today. It was here this afternoon, but somehow has disappeared tonight.

Client had a building on which she sold a contract for deed for the building. There was a downpayment of $5000 by the purchaser and the balance is scheduled to be paid out in payments, with a balloon payment at the end. At that time, she will provide a deed to the purchaser.The seller still has a mortgage on this building, on which she is paying.

My questions are:
1. On a tax return, is this handled the same as a regular installment sale of the property?
2. How should the interest that she is paying on this building, while the contract is in effect, be handled?

Thanks to all for your thoughts.

LT

[JG EA]

Posts disappear on me all the time. It is because I preview the post and leave it without actually posting it.

Yes it is handled as a regular installment sale. It is a wrap around. Your client counts the interest she pays and the installment principal she receives at gross profit percentage and the interest received at 100%,

The benefit of counting the interest deduction (especially if it is investment interest) may not be a complete offset dollar for dollar for the interest coming in.

Form 6252 and Schedule A.

[thomtax]

Thanks - This is the first time that I have had it happen to me. I checked in the afternoon to see if there were any replies and there were not. Then when I went back in last night, it was just gone. I was beginning to think I was imagining things.

Appreciate the reply.

LT

[thomtax]

The benefit of counting the interest deduction (especially if it is investment interest) may not be a complete offset dollar for dollar for the interest coming in.

Form 6252 and Schedule A.

JG, Do I interpret this to be that the interest she pays would be included on Schedule A as investment interest? This is then on 4952. Am I hearing this correctly or have I managed to misinterpreted it? And for clarification, this building was first used for a business, then changed to being rented our before the sale was made.

Thanks for your help.

LT

[JG EA]

Yes that is what I am saying. Form 4952 if needed and then to A. Form 6252 for the installment sale.

I've had several over the years that started out not too bad, but then at some point not being such a great deduction because of lower investment interest paid and not enough other A deductions and all the interest to declare as income.

[thomtax]

Thanks JG. The reason for the second guessing was that I had one preparer tell me that the interest paid was not deductible and that just did not seem to follow reason. Of course, I'm the first to admit that taxes do not always follow reason.

LT