My client, the seller, sold his home and took a note in 2009 as his buyers could not qualify for a loan. Down payment was made and loan amortization schedule run. So far no problem. There is a "contract for deed" detailing terms of purchase and recorded at courthouse, HUD-1 prepared by atty. Here is my quandary. This contract includes an additional payment of $302.50 per month described as an escrow payment for real estate taxes and insurance which earns no interest. The 1098 is from the original mortgagor and is still in the names of the sellers. The buyers pay the sellers, then the sellers pay the mortgage, which includes the taxes & ins. Is this what is called a "wrap-around?" The sellers want to deduct the mtge interest and taxes on Sche A. I am amazed the bank goes along with this but whatever. I claim the interest they receive on the note on Sche B, no principal since they had no gain. I am still trying to figure out where to put the $302.50 for ins and taxes. Other income? Or would it just be non-taxable gain from the sale of their home under 121? Taxes deductible? I guess they are still liable for them due to original mortgage still in effect?
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Last edited by Burke; 02-07-2011, 06:40 PM. -
Taxes? Aren't the buyers really paying the taxes? But the interest goes on investment interest. Although it was a home, the fact that they are holding the note makes it investment expense. This works fine as long as they have investment income and as long as they can itemize. It doesn't work so well when they can't itemize.Originally posted by Burke View PostJG -
Property Tax and Insurance
That part of the payment does "confound" the entries - seems like it could be a "wrap-around"
If you report the property tax portion as received, then there would be a deduction on Sched A - however, there is no deduction for the insurance portion. As there is no interest earned on the property tax or insurance, the question would be whether to show those amounts on your t/p return.
As it appers that the mortgage company is going to report the property taxes paid, I might be inclined to at least show that as received as other income with a Schedule A deduction.
JG has a point on the Investment Interest, as it is no longer the t/p residence.
SandyComment
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I agree. It does seem to me to be a proper sale. So it looks to me like the sellers are only paying the real estate taxes as a convenience to the buyers, and it was set up that way in the contract so that the sellers could make sure their obligation to the mortgagor is met each year. The mtge interest deduction, if treated as investment interest paid, would be less than the seller-financed interest on Sche B, so that is not a problem. But here's a wrinkle. The sellers are now divorced and must split all this on each's return. Therefore, neither of them has enough to itemize. So I guess that solves my immediate problem, but I would like to know the true treatment of these items for future reference. I will only be doing the husband's return. But that mtge int 1098 is reported to the IRS under the husband's SSN and goes to the wife's address with both names on it, and what do you want to bet she will take the whole thing? And not report the financed interest as rec'd since there is no 1099 reporting on it?Last edited by Burke; 02-08-2011, 12:38 PM.Comment
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Contract is not a wraop-around mortgage
I sold some property the same way. Initially I was going to do it as a wrap-around mortgage, but I found that the bank which held my mortgage had to agree. Consequently, I sold it as a contract for sale. I collect principal, interest and escrow. I pay the tax and insurance from the escrow account. The person who bought it from me was able to claim a homestead exemption based on the contract which is filed with the county clerk.Comment
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Sounds exactly like my situation. So the mtge is still in your name? Are the buyers actually listed in county records as the owners? So they get the reassessment notices each year? And how do you handle the reporting of all these items on your tax return? Not sure what the homestead exemption does. Is the buyer allowed to deduct the RE tax?Originally posted by taxxcpa View PostComment
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I send the following information to the buyer each year:Originally posted by Burke View Post
Principal paid: $XXXXX
Interest Paid: $ XXXXX
Escrow Paid: $ XXXXX (tax & ins was increased)
Real Estate taxes paid: $ XXXX ( prior year was $ 5,472.21)
Insurance paid: $ 1,210.31 (prior year was $ 1,100.97)
Balance Due on Loan: $ XXXXX
Remaining payments as of Dec 31, 2009 under the terms of contract: 147 plus a balloon payment on the 148th payment.Comment
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Fantastic. Thanks so much for the info. Makes perfect sense to me. Now, if I can just convince the TP's.Last edited by Burke; 02-08-2011, 01:15 PM.Comment
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Sorry. Have one more question. Do you agree with the allowable deduction of the bank-reported interest to the seller as investment interest on Sche A?Comment
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Investment Interest
Yes as long as the investment income (from this sale plus any other dividends & interest) is more than the interest expense.Originally posted by Burke View PostComment
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And if it is it can be carried forward on Form 4952? Anyway on the investment form.JGComment
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