Wraparound Mortgage

[buzzardbreath]

Client bought an investment house because it was cheap, and had to borrow the money to buy it.

He kept it, put a few repairs into it, and sold it for a modest profit, but sold it on a 15-year installment
to the buyer.

So he is financing a house that he himself has had to borrow against when it was purchased. He thus has
interest income from the buyer's payments, and interest expense to the original mortgage company. I believe
this is called a "wraparound" mortgage.

He has to claim the interest INCOME on sch B. But his interest EXPENSE fits the classic definition
of "investment interest" and is an itemized deduction.

Our problem: He doesn't have enough itemized deductions to outstrip the standard deduction of $12,200.
Question: Is there some other way he can claim the interest he pays out that would be more beneficial?

[Koss]

Interest Expense

Maybe he could get the lender to capitalize all that interest, and then include it in his basis for the property...

-

Just kidding.

I don't see any way it could be deductible except on Schedule A.

BMK

[Golden Rocket]

Add to Basis

In many situations where investment interest expense is of no help, the payer can capitalize it into the basis of the asset.

Hard to do that when the asset has already been sold, right?

[JON]

iNVESTMENT iNTEREST

Why anything else?? Schedule A against B - if you do not get a benefit you carryforward. If he sold the real estate he then owns no asset to add the interest to??? I have never seen carrying charges capitalized onto a contract treceivable or am I missing something??

[taxxcpa]

Why anything else?? Schedule A against B - if you do not get a benefit you carryforward. If he sold the real estate he then owns no asset to add the interest to??? I have never seen carrying charges capitalized onto a contract treceivable or am I missing something??

I agree, he cannot add to the asset he sold. This is investment interest expense and if it along with other Schedule A deductions are less than the standard deduction, you can't move it elsewhere any more than you could move your real estate tax or mortgage interest to some other place so you would get it on top of the standard deduction.

I doubt if the sale could be a wraparound mortgage. A wraparound mortgage generally requires the original mortgage holder to approve of the deal. I have sold a couple of houses while I still owed money on an existing mortgage. In one case I sold it under a "contract for sale." For the next sale, the laws had changed creating a lot of hassles if sold under a contract for sale, so I gave him a warranty deed. After collecting most of the mortgage on the first sale, I also gave him a warranty deed. A deed of trust is the document in which the amount the buyer owes the owner-financing lender.