Real Estate Contract

[DONNA ASTON]

This house was a rental property since 08/2007. Adjusted basis is $232,187 she sold it on a real estate contract in 02/2011 for 214,000 down pmt of 7,000 bal 207,000. The contract states the buyer pays monthly installments of $1,053.67 4.54% interest and in addition $296.33 per month for property taxes and hazard ins. The monthly BOA payment is 1673.00 which escrow agent will accept all amounts paid in accordance with this contract. Thus the buyer pays 1,350 a month and my client (seller) $324 per month. The escrow co gave a statement with $8680.27 paid interest from 02/11 thru 12/11. My client's 1098 mortgage statement is in the amt of $13,284 (which includes 1 mo interest on sch E). We have tossed this around and have clients with the interest expense is less than the interest income but this is not the case so wondering what thoughts are out there for numbers on sch B and sch A. Thanks.

[taxea]

Sounds like your client is the seller. Most people who sell on installment contract don't have the buyer pay to the mortgage company. The seller normally does not have to pay anything but rather holds the mortgage and the seller pays the monthly payment directly to the seller. This seem a bit confusing to me.,

The issuer of the 1098 needs to detail what was paid to principal, to interest, for insurance and taxes to whomever they paid the expenses on behalf of. Seller and buyer should be issued separate 1098's and to the buyer with the detail.

Try working it out on an installment sale form

[DONNA ASTON]

We are a bit confused as why this was set up this way also. The Escrow company pays Bank of America directly. It states that in the real estate contract. The 1098 from Bank of America is in my clients name(seller) one amount. The escrow co told my client to use the information on her 1098. I asked her to request a statement from the escrow company and it is one account.

[DONNA ASTON]

taxea: So basically what you are saying and what me and my partner said today is this needs to go back to the drawing board. My client states the agreement was she pays and deducts her portion and the buyer deducts his portion but there is nothing on paper to back it. There would have to be 2 1098's one to seller and one to buyer. I have many clients with installment forms never come across this. Scratching my head right now

[S T]

Donna,
Is B of A the mortgage holder prior to the Sale and that is why the contract was set up for the Buyer and Seller to pay on the Loan each month the respective amounts you indicated? But the 1098 is being issued only in the Seller's Name?

Seems like the Escrow Co is involved in the Record Keeping on the Contract?

Appears it could be a Seller Assisted Loan - Your Client is the Seller?

[DONNA ASTON]

yes BOA was the holder prior to the sale it was a rental. Yes the 1098 is only issued in my clients name (seller)

[Gary2]

taxea: So basically what you are saying and what me and my partner said today is this needs to go back to the drawing board. My client states the agreement was she pays and deducts her portion and the buyer deducts his portion but there is nothing on paper to back it. There would have to be 2 1098's one to seller and one to buyer. I have many clients with installment forms never come across this. Scratching my head right now

I don't know where you get the idea there should be 2 1098s.

Start by rewriting the problem. An initial, loose stream of thought simply doesn't work for understanding the mechanics of a transaction. Begin by listing the questions to which you need answers, presumably interest income, sale income, interest expense, etc.

Then identify the players: Buyer, seller, mortgage company. If the escrow company is an intermediary, are they even relevant to the question? If not, leave them out.

Next, you can get to an important question you didn't ask: When did the sale occur? Not every contract creates a sale at the start of the contract. This is a legal question that may take research. I'm not familiar with the sort of deeds of trust common out west. In my part of the country, the mortgage holder would never allow a sale without discharging the mortgage, so this sort of deal would have to be structured as a lease to buy - with rental income, not interest income. But it's probably different where you are.

Then, if it really is a current sale (and it probably is, if a lawyer wrote it as described), reevaluate the players. Is the bank also in the role of seller? Does the buyer have an obligation to the bank? Or is the buyer's obligation to the seller, while the seller's mortgage has taken the character of a loan on an investment? Merely requiring the buyer to send payments to an escrow company doesn't prove the buyer has an obligation to the bank; The escrow company could be acting in the role of agent for the seller - which would lean towards them being irrelevant to the questions.

Notice that none of the above involves numbers. You can't do the math without first understanding the transactions. So try rewriting the question with no dollar amounts, and see what the question would look like.

[DONNA ASTON]

Gary: this is considered a sale out here. Therefore interest income comes into play instead of rental income. In this particular case the client (seller) has a loss on the sale and is not receiving the entire payment to cover BOA loan. Usually this is not the case for me. My brain is not thinking it is late here

[S T]

Donna

More - thinking after Gary's Post - Okay so not an installment sale due to loss - So the sale would be one transaction. Form 4797 (Rental Property)

Then you have the reporting of the interest received on the seller assisted note - client should have been provided with an Amortization Schedule -Client would report on Sched B the amount of interest received from the Buyer's Payments, (not principal and property taxes)

Client then would deduct on Sched A or 4952 (?) the Mortgage Interest she paid on the property (not including the one month rental allocation - which would be Sched E)

Bank of America will only issue one 1098 form to the Seller (Debtor on Mortgage)

????

Sandy

[DONNA ASTON]

ST: Thank you Thank you! you are right it is not an installment and we never thought that it was due to the loss on the sale. The reason I put the numbers up there in the first place is because we were trying to figure out what amount goes on SCH B and what amount goes on SCH A and does it get reported on 4952 on SCH A for my client (seller)? the buyer is not my client. My problem is the escrow company reports all interest and principal paid to BOA there is no breakdown between what interest the buyer and the seller pays. The only other document I have right now is the my clients 1098 fr BOA. any suggestions?

[Burke]

ST has it right, IMO. You have three separate transactions to go on the return.

(1) You have an ordinary loss of $18,187 on 4797 using your figures. (Note you said sold for $214,000. Did you add selling costs to adjusted basis or account for them in another way?)

(2) Then you have interest income from a private buyer on Sche B, based on an amortization schedule where principal is $207,000 and the interest is calculated at 4.54%. If you (or your seller/client) do not have such an amortization schedule you can run one on any number of websites. But the buyer should have been provided one at closing. This figure comes from that document based on the number of payments made in 2011. (The buyer gets to deduct that amt if they itemize, assuming it is their personal residence.)

(3) Then you have a deduction on Form 4952 for the interest paid to BOA on the original note by your client, the selller. This may be limited to investment income on Sche B from whatever source, and perhaps any capital gains on the return. So the amount paid to BOA and the amount deductible could vary each year.

As an aside, the buyer gets to deduct the real estate taxes as the new owner on city/county records. I am also assuming the $296.33 each month includes the full real estate taxes due. If it also includes insurance, that amt is just ignored since it is not deductible by the buyer or by the seller. The escrow company is merely the collection agency and pass-through for these amounts. I see no reason for the escrow company to provide any breakdown, and I cannot tell you if the interest figure they came up with is correct for the buyer, since we are not given the term (or terms) of the loan. It does not matter that the seller is not receiving the entire payment to cover the BOA loan. He has already taken the loss on 4797 in full.

[S T]

Burke, thanks for posting that, I have not had a spare minute to address Donna's issues since last post - been "hand holding" Senior Clients today, Burke, You also stated it so much better than I would of.

Donna - the escrow statement on interest paid will have to be addressed by you for your Seller, run the Amortization on the Sales Price at Interest Rate stated in the Contract - for the period of time and that will give you Schedule B Seller Assisted Interest to report (amount received as interest from the Buyer via payments made)

Donna, pro-rate the 1 month it was a Rental to Sched E for the 1098 Form B of A - rest on the Form 4952 On Schedule E you only have 1 month of Property Tax (based on your prior post) Your seller will not deduct any property Tax on Sched A

Hope between Burke's post and others this addresses your concerns,

Sandy

[taxea]

taxea: So basically what you are saying and what me and my partner said today is this needs to go back to the drawing board. My client states the agreement was she pays and deducts her portion and the buyer deducts his portion but there is nothing on paper to back it. There would have to be 2 1098's one to seller and one to buyer. I have many clients with installment forms never come across this. Scratching my head right now

We, there you go, this was an agreement between the buyer and the seller...do they have a sales contract. Let me see if I have this right...
S (seller) has an existing mortgage with BOA. S and B (buyer) enter into a deal whereby the B pays the agreed upon amount directly to BOA and the S pays the balance because the B's payment doesn't cover the S's mortgage. The confusion arose because BOA doesn't have specific information.
If this is correct then I think they do need to go back to the drawing board. If it is not already done, S needs to prepare an Installment Sale Agreement that specifies everything in detail. (Samples can be found on the internet). S and B sign the agreement and keep BOA out of it.
Buyer makes the monthly check directly to S and S writes a check to BOA for the full amount of the mortgage.
S is responsible to provide B with a 1098 accounting at the end of the year. This accounting details gross payments, total interest, total principal and any additional payments made.
S's tax return includes an Installment Sale form so that principal paid for the year reduces the principal of the loan and interest is reported on Sch B.
B reports the interest paid on Sch A.
If the property tax and insurance are the responsibility of the B, then the 1098 from the S should include those figures. These items should also be detailed in the Installment Sale Contract.
If the property tax and insurance are being paid by BOA through Escrow from the S's mortgage, then the payments by the B should be made directly to the S to reimburse for these items.
S does not report the property tax on Sch A, B does.

Does this make sense? Did I miss anything. I just hate it when people who are ignorant of the proper way to do things don't seek advice before they jump in the lake! All they do is make more work for the rescue crew!

[DONNA ASTON]

Burke and Sandy: I didn't have time to answer today but thank you and that is what I did before I read this post so thank you all for the help. The client also got a little explanation about this today and I think she probably if she would of asked ahead done things different.

[Gary2]

S is responsible to provide B with a 1098 accounting at the end of the year.

Great job writing it up step by step.

Given what we know, I don't think S is actually required to issue a 1098 (being neither a lender nor in the trade or business of selling real estate). That doesn't make it a bad idea, though, as it will help ensure that the amounts they each report match up.