Vendor Financed Mortgage-Interest Foregiven

[equinecpa]

A client of mine sold their home about 8 years ago. They took back a note for $100K and have been reporting interest income on it every year on their tax return.

This year they told me they are going to just let the buyer pay a total of $100K and call it good. They will receive final payment next month. So they've reported interest all these years and didn't really earn it? I'm doing their 2014 return right now and wondering if I should leave off the interest earned for 2014? Or should that be recorded as income, and then in 2015 they have a capital loss on the note they carried equal to the remaining balance on the original note?

Carolyn

[equinecpa]

Hmm...no replies.

I'm going ahead and including interest for 2014, since until that note is settled in 2015 I'd think that's what it would be. I'm thinking a capital loss will be incurred upon the settlement of the note. Does the fact that the property sold was a principal residence taint the capital loss in any manner? I'm thinking not as the loss is on the note taken back not the property itself.

[taxmom34]

sounds like

an installment sale except that it was sale of personal residence (installment sale not allowed on loss) and no loss on sale of personal residence. was it reported as a sale 8 years ago? not knowing for sure but sounds like they reported imputed interest (nothing wrong with that).