Interest and contract for deed

[JenMO]

Client sold house contract for deed, installment payments. He still owes money, where does the interest he is paying deducted?

[jimmcg]

Deduct as interest paid on seller financed mortgage. Take a look at Pub 936 and appropriate cites.

[taxxcpa]

I reported the interest I paid on a house I sold that way on Form 4952, Investment Interest. I believe the deduction cannot exceed your investment income which would include the interest you receive on the installment not plus any dividends or other investment income.

Edit Note: I originally typed the form number as 4962, not 4952

[Gretel]

I agree with both posts. Which approach is correct depends if this house is a personal residence or investment property.

[taxxcpa]

What would the difference be? If you sold a personal residence and carried the note, the interest you collect would be investment income. Same if you sold a rent house or commercial building you had been renting. You would still be able to deduct the investment interest up to the extent of investment income.

[Burke]

Client sold house contract for deed, installment payments. He still owes money, where does the interest he is paying deducted?

Maybe I am a little dense, but I am trying to figure out this question. If client sold the house under an installment contract, he is receiving interest on the note, and that is reported on Schedule B. What interest is he paying that you are trying to deduct?

[Gretel]

What would the difference be? If you sold a personal residence and carried the note, the interest you collect would be investment income. Same if you sold a rent house or commercial building you had been renting. You would still be able to deduct the investment interest up to the extent of investment income.

You are right, both scenarios would produce investment expenses. Logically, if you don't own a home any longer it is not your home any longer. Period. Any payments that were home interest before are not something else. I also read Burke's post, so lets see if we are even talking about what we think we are talking about.

[taxxcpa]

Maybe I am a little dense, but I am trying to figure out this question. If client sold the house under an installment contract, he is receiving interest on the note, and that is reported on Schedule B. What interest is he paying that you are trying to deduct?

As I understood the question it involved a contract for sale on an installment contract. At the time of the sale, the seller still owed on a mortgage he had used to finance the purchase of the property so he still paid interest to the bank while collecting it from the new buyer.

I had the same situation come up. I sold my residence and still owed some on my mortgage. The buyer was turned down by his bank (poor credit) so I seller-financed it. About a year or two later I paid off my mortgage, but until I paid it, I still had interest expense which I classified as investment interest.

The happy ending was that after paying on the mortgage for ten years (usually paying late and once missing three payments) the buyer's rich uncle (or someone) must have died and left him a lot of money, so he paid the entire remaining balance in January 2013.

[Roberts]

As I understood the question it involved a contract for sale on an installment contract. At the time of the sale, the seller still owed on a mortgage he had used to finance the purchase of the property so he still paid interest to the bank while collecting it from the new buyer.

That's the way I was reading it and it seems they should file just as you wrote in your original reply. It seems the cleanest.

[Burke]

Well, that additional information does make a difference. And I have that exact same situation going on with a current client. Interest received goes on Sche B. Mtge interest seller still owes bank goes on 4952 to the extent of investment income. This year, he had deductible investment interest (on the mortgage) in excess of investment income, so there is a carryover to 2013. That happened because the buyer did not make all the payments he should have.