Interest On Deposit For Condo

[susieq]

Tp, along with a friend, deposited funds with a builder beginning in 2004 ($45,000) 2005
( $59,000) In the contract (in fine print - one line) it stated that interest would be paid at the time of the closing to the buyers (1/2). Also, the builder would get credit for the other half of the interest.

For 2004, my client received a 1099-INT from the law firm representing the builder for $180.
We reported that on his 1040.

He received a 1099 for 2005 for $1690. Now for 2006 another 1099 INT comes for more than $3,400. He closed in 2006.

We did not know what this interest was for. Just reported it in total on the Sch B.

Now comes our client - with the story. Seems as if the 1099 is 100% of the interest paid - including the builder's share. I suggested that we send a 1098 for these years to his partner for 25% of the 1099's and 1098 the lawyer/builder

What would you do with the builder's share of the interest. Doesn't seem fair that the taxpayer should pay tax on the builder's interest.

What about adding the interest to the two partner's basis in the property ?

[jerome]

The rule is, if you receive a 1099-INT and not all of the interest belongs to the taxpayer, you nominee the interest to the other person that it belongs to. You report the full interest on the taxpayer's Schedule B, and then subtract the nominee distribution on the next line. Then file Form 1099-INT and Form 1096 with the IRS and give a copy to the owner of the income.