Property Installment Sale - Interest Income/Deduction

[AuditorTurnedGood]

All,
I hope everyone's season is going well!. I have a bit of a complex situation I could use a second set of eyes on. Its is:

The S-Corp bought and improved a home and then sold it on a contract for deed, all in 2007. The S-Corp is treating it as an installment sale on 6252. In 2008, the buyer of the property made payments based on principal plus 9% interest. I should say, though, that the payments were made directly to the bank that holds the note on the home from its original purchase by the S-Corp, and is secured by the residence..

Thus, the way the return looks right now, the S-corp is passing the 9% interest out to the individual return on the K1 in addition to the gain on the sale. Now, if the buyer was paying the S-corp, and the S-corp in turn paid the note, I would assume the S-corp would have income of the 9% and a deduction of the interest paid on the note, which is 6%, for a net 3% income. If this is right, can it still be the case even though the payments were made directly to the bank?

[Burke]

If the sale contract is between the S-Corp (owner of property) and the buyer, then the fact that payments are being made directly to the bank would be disregarded in normal circumstances, IMO. It sounds like it is being correctly reported as an installment sale. Why is the buyer paying the bank directly? I am a little unclear on a couple of things. I am assuming the note the bank is holding is the original mortgage? That interest rate is 6%? But the buyer is paying 9%. Is this the interest rate specified in the note between S-Corp and buyer? If buyer is paying bank directly, what is the bank doing with the extra 3%?

[AuditorTurnedGood]

the extra

9% is being applied to the loan balance, and yes, the loan is the original purchase mortgage for the property. So, what I'm hearing from your response is that the installment sale treatment is correct, including the interest income to the S-Corp. Does the S-Corp have any kind of interest deduction in this case? Thanks for the response!

ATG

[taxea]

The S-corp has a mortgage interest deduction of the 6% and interest income of 3%. The buyer has an interest expense of 3% from the installment agreement. taxea

[AuditorTurnedGood]

Thanks for the help

I have just found out the owner of the S-Corp is the person who actually holds the bank note on the property sold within the S-corp, so a 1098 has been issued to him as in individual. I passed the entire 9% through as interest income on Sch. B, and gave him the deduction for the 6% on Schedule A. This seems better than putting it on the 1040, backing it off, and then putting it onto the S-Corp, doesn't it?

ATG

[Burke]

As I understand the situation, SCorp has income of 9% interest from buyer. SCorp should also have installment gain income. Then SCorp has 6% interest deduction to noteholder. Noteholder (who happens to be shareholder) has income of 6% on note. Who issued the 1098? Is shareholder/noteholder the ONLY shareholder? Whether shareholder has income from SCorp would depend on other income/expenses and whether there is a net profit or loss. Is this an operating business or is it just existing to pass through the installment sale?

[AuditorTurnedGood]

The shareholder

is the only shareholder of the S-Corp. The note is a mortgage held by a bank, in the name of the shareholder. The 1098 was issued by the bank to the shareholder. The S-Corp is active in flipping property, as well as selling real estate as a real estate agent, with a net profit outside this transaction for the year. This is the only property sold on CFD. Thanks, Burke, for what has been your tireless effort to help me sort this through. You too taxea!