Tax Reduction and Owner Financing

4 Replies

Hi All,

I am learning about owner financing and one of the question I have right now is "how does the tax reduction works in the owner financing". 

A normal mortgage company mails a IRS Form 1098 on the interest we pay. How can we get this if we construct an owner financing deal?

Any info will help.

Thanks,

Phat

Originally posted by @Phat Vi :

Hi All,

I am learning about owner financing and one of the question I have right now is "how does the tax reduction works in the owner financing". 

A normal mortgage company mails a IRS Form 1098 on the interest we pay. How can we get this if we construct an owner financing deal?

Any info will help.

Thanks,

Phat

 If the loan is secured by the underlying asset (real estate) then the note holder (lender) will issue a 1098 to the asset owner (buyer) with the amount that the asset owner paid in interest to the note holder during the year.

If the note is not secured by real estate, the asset owner will issue the note holder a 1099 detailing the interest paid to the note holder during the year.

There are exceptions to the 1098 and 1099 requirements that may apply, however.

Many sellers who carry a mortgage will not be engaged in a trade or business, and will thus not be required to issue a Form 1098. (Treas. Reg. 1.6050H-1(c)(1).)

Similarly, if the principal borrower on the note is not a natural person (i.e., it is an entity), then the seller will not be required to issue a Form 1098 even if they are engaged in a trade or business. (Treas. Reg. 1.6050H-1(b)(1).)

If the seller is a natural person and that is who you pay interest to, you may not be required to issue a Form 1099-INT. (Treas. Reg. 1.6049-5(b)(1).)

The rules are technical, and you should consult a tax professional to determine how they apply to your facts.

@Brandon Hall @Stephen Chittenden

Thanks so much for the information. I have a follow up question on both scenarios:

1) assume that I need either a 1098 or 1099 from the seller. How does an average Joe (seller) know that they need to send out this form? Am I supposed to ask them every year?

2) assume that the seller is not required to issue 1098 or 1099 form to buyer. How do I document the interest that I paid during the tax return time?

Thanks,

Phat

Originally posted by @Phat Vi :

@Brandon Hall @Stephen Chittenden

Thanks so much for the information. I have a follow up question on both scenarios:

1) assume that I need either a 1098 or 1099 from the seller. How does an average Joe (seller) know that they need to send out this form? Am I supposed to ask them every year?

2) assume that the seller is not required to issue 1098 or 1099 form to buyer. How do I document the interest that I paid during the tax return time?

Thanks,

Phat

 Brandon can probably answer better than me, the seller would only ever provide a buyer with a Form 1098, if anything.  Most sellers likely will not have to provide a Form 1098.  If you pay interest to anyone in the course of your business, it is generally deductible.  You would deduct the interest on your return, keep a copy of the written loan, and checks/bank records that document the payments.