How to report sale of personal residence under contract for deed

[Art]

IL taxpayer (single) sold personal residence for $150,000 under contract for deed in Sept 2013 receiving a down payment of $15000 and took back a 30 yr 5.5% note with a 5yr balloon. She purchased the home in 2003 and used it as her personal residence until Nov 2011 when she purchased a new residence. She attempted to sell the old home, but could not find a buyer to do a straight sale and finally had to do the contract for deed. Taxpayer still has a mortgage on the property and continues to make her loan payments. Taxpayer meets the 2 out 5 yr rule for using the home as a personal residence and the gain is less than $250,000.

Question 1

Does this qualify as a 2013 sale for purposes of the Sec 121 exclusion so taxpayer would only need to report the interest income on the note payments from the buyer?

Question 2

Is the interest that she (seller taxpayer) pays on her mortgage on the old home deductible?

[New York Enrolled Agent]

IL taxpayer (single) sold personal residence for $150,000 under contract for deed in Sept 2013 receiving a down payment of $15000 and took back a 30 yr 5.5% note with a 5yr balloon. She purchased the home in 2003 and used it as her personal residence until Nov 2011 when she purchased a new residence. She attempted to sell the old home, but could not find a buyer to do a straight sale and finally had to do the contract for deed. Taxpayer still has a mortgage on the property and continues to make her loan payments. Taxpayer meets the 2 out 5 yr rule for using the home as a personal residence and the gain is less than $250,000.

Question 1

Does this qualify as a 2013 sale for purposes of the Sec 121 exclusion so taxpayer would only need to report the interest income on the note payments from the buyer?

You might want to read a Tax Court case Keith 115 TC 605 which holds that a contract for deed constitutes a completed sale and the gain is recognized in the year of the transaction.
The head note reads: CONTRACTS IN DEED WERE COMPLETED SALES; GAINS INCLUDABLE IN YEAR EXECUTED.


Based on that case, it would seem the answer is yes.

[Art]

But the deductibility of the interest expense on Schedule A still bothers me. Since she no longer lives there, it is not her personal residence. So how does it meet the test to be a "qualified home" ? The only thing I see is if you can fit it in as "second home not rented out." Since she still has legal title to the home (the buyer only has an "equitable interest" in the home) and she is not renting it out or holding it out for sale, she does not have to use the home herself. Does this meet the test or is there something else that I as missing here?

[Burke]

If you are talking about the mortgage interest she is paying because she still has the original mortgage, that is now investment interest on Sche A. She can deduct up to the amount of interest income she reports on Sche B. Any excess is carried over. See Form 4952.

[Art]

Thanks for all of the input.

Art