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Archive for March 2012

Selling your home – ask a tax pro BEFORE you sign

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It’s been a busy year, and kind of an unusual one. The regular job (AKA “the one that pays the bills”) has been eating into my writing time, and what time I’ve been able to spend on tax matters has been mostly occupied answering questions on . However, there is one issue that has come to the forefront, more or less, and it’s prompted me to write this post.

The housing market still hasn’t recovered from the great meltdown of 2006-2007. Would-be buyers find that they can’t qualify for a mortgage, and would-be sellers find themselves stuck with a home that they can’t sell and can’t afford to keep. It’s not a surprise that people are looking for ways out of their predicaments – and not a surprise that there are others out there who are more than willing to “help” them – for a fee, of course.

For the first time in my 20+ years of doing tax prep, I’ve actually had to deal with people who have become sufficiently concerned about the situation that they are willing to do some form of seller-financed deal. What sellers – and buyers – don’t always realize is that those deals come with tax consequences (surprise!), and the tax consequences can be sticky for both parties.

If you are the seller in one of these deals, you must:

  • Claim the interest portion of the payments you receive from the buyer as interest income on Schedule B of Form 1040.
  • List the name, address, and Social Security number of the buyer as the payer of the interest on Schedule B.
  • Not deduct interest on an existing mortgage that you still have on the property as home mortgage interest on Schedule A. That interest is deducted as investment interest on line 23 instead, and only the amount of that interest (plus other Line 23 expenses) that exceed 2% of you AGI can be deducted.
  • Figure your gain on the sale (if any), and determine whether you want to treat this as an installment sale for tax purposes. Normally, if you have a gain on the sale of a personal residence, all or part of the gain will be excludable. If you can’t exclude the gain (either because it’s not a personal residence or because you didn’t live in it long enough), you can spread it over the life of the contact by using Form 6252, Installment Sale Income, in the year of the sale and each year thereafter.
  • If you are a buyer, the one thing that you need to be sure happens is that the seller records the mortgage in accordance with state law. If the seller does not do that, you will not be able to deduct the interest that you pay the seller. You will also need to list the the name, address, and Social Security number of the seller on your Schedule A to claim the mortgage interest deduction. Note that this is reported on line 11 of Schedule A, not line 10.

    Both buyers and sellers need to be aware that the vast majority of mortgage agreements include a “due on sale” clause – which means simply that the balance of any current mortgage on a property being sold is due to the current mortgage holder when title to the property is transferred. Most mortgage holders, in the current climate, are willing to look the other way as long as they are being paid – but if interest rates start going up, look out, because there’s a good chance the mortgage holder will be more inclined to call the loan if they can get a better deal with someone else.

    Don’t just take the deal to an attorney – get your tax pro involved if you’re thinking about doing a wraparound mortgage, a land contract, or even a straight seller-financed mortgage. You’ll be happy that you did.


    Written by nctaxpro

    March 25, 2012 at 9:43 am