Land contract interest

[ary]

Seller sold property 2 years ago.
Seller still holds original mortgage and pays bank. Receives 1098.
Buyer pays seller on land contact.
Seller interest paid to bank is 5000.
Seller interest received from buyer is 9000.
Seller reports interest on Schedule B.
Seller cannot itemize even with the 5000 on the 1098.
Is there anyway to deduct the 5000?

[Bees Knees]

Unless seller is a bank or mortgage company or real estate broker, selling property on a contract for deed is an investment activity. Investment interest expense paid by an individual is only deductible on Schedule A.

Sorry. Those are the rules.

[ary]

Thanks, I was making sure. Appreciate the come back.

[Roland Slugg]

My advice to that seller would be to convert the contract sale to a regular sale, with a recorded deed. There are three ways to do this:

1) Buyer gets a new loan roughly equal to the seller's existing loan, and seller carries a 2nd D/T for the rest.
2) Buyer buys the property and gives the seller an AIDT ... aka a "wrap."
3) Buyer buys the property and assumes the existing loan, if the current lender can/will agree to the assignment.

In all the above scenarios the net economic result will be the same as it is now, except that the seller will only be paying tax on his "net" interest income ($4,000 using your figures) instead of the gross interest he receives.