Owner Financing - Interest Question..

Hi,

Can you deduct the interest you pay when the owner is financing you, just like when you can deduct the mortgage interest for tax purposes.

thanks...

yes. like you said,

just like when you can deduct the mortgage interest for tax purposes

He should send you a 1098.

_________________
"A deal is only as good as the quality of your Contracts." --Me

[ Edited by LeaseOptionKing on Date 01/18/2008 ]

As I recall a 1098 is not necessary for interest from an owner financed property. Don't bank on my increasingly poor memory, though...

Chris

Negotiate harder. I've gotten sellers to finance deals with no interest at all, then you don't have to worry about keeping track of it. When you're pitching the deal, focus on the payment, and if they squawk about the lack of interest, tell them, "well, then we'll have to take a closer look at the contract price..., we do no interest deals all the time..., in this buyer's market it's common...,etc." Just be sure to disclose somewhere that there may be IRS implications, as they may impute an interest rate if the seller is ever audited.

Negatory on that, Chris. You have to provide a 1098 by January 31 (just like any other lender) and send that (along with a 1096--Transmittal Form) to the IRS by February 28. No amortization schedule is required to be sent, though. [addsig]

Borrowed over a million on a purchase money mortgage in 2000- paid quite a bit of interest over the next five years- never got a 1098, although the prior owner was a large corporation and everything went through their accounting firm. Thought I remembered checking on this and finding that it wasn't necessary for owner financing. Guess I should look again...

Chris

I believe you only need to file Form 1098 if you received more than $600 in mortgage interest in the course of your trade or business. If you are flipping property and routinely seller finance to facilitate the sale and to improve the yield on the deal, then the mortgage interest is received in the course of your trade or business. If you are in the mortgage lending industry, then mortage interest is received in the course of your trade or business.

In a typical seller financed sale, the owner occupant homeowner carries back some or all of the sale price to facilitate the sale. This seller holds the mortgage on his former personal residence, receives mortgage payments from his buyer, and is not required to file Form 1098.

In lieu of a 1098, the seller reports the mortgage interest received from a seller financed mortgage on his Schedule B (1040) along with the buyer's name and SSN. In a corresponding fashion, the buyer reports the interest paid on his seller financed mortgage on Schedule A (home mortgage interest) along with the seller's name and SSN.


[ Edited by NewKidInTown3 on Date 01/19/2008 ]

This company mostly sells potatoes, so I guess the land sale was not in its normal course of business.

Chris

That's true. If the Seller is doing this on what was his primary residence (or otherwise in a limited fashion), a 1098 is not required; however, one's main income could come from a job in a widget factory, yet if the Seller is an active investor, the 1098 would be required. I assumed (perhaps incorrectly) that the query was in reference to buying from such an investor. Many investors buy sub2 and sell via a wrap. The same applies for 1099s. When doing sandwich leases (for example), we have to send the Sellers each a 1099MISC for the rent we pay them. Our Tenant/Buyers won't send us a 1099, since they are simply paying rent, but if we do this as a business, we must send a 1099 to anyone we pay $600 or more to in a year. Corporations are exempt, so the thousands we paid to a major company (like Home Depot) would not require a 1099. Likewise, if we incorporate, people who pay us in cash are not required to send us a 1099, eliminating many paper trails that are unnecessary would-be audit-triggers. Corprations are cool like that! Attorneys are generally incorporated (PC-Professional Corporation), but they are not exempt, so you must give your attorney a 1099 if you pay $600 or more in any given year.

_________________
"A deal is only as good as the quality of your Contracts." --Me

[ Edited by LeaseOptionKing on Date 01/20/2008 ]