Real Estate Investor · Burnsville, MN · Member since 2010 · 16 posts · 1 vote
state of Minnesota, can a buyer on a CD claim the Mtg.Int. Tax deduction if he/she is making the mtg. payment or enough of a payment to cover the mtg? Also, what if the house has no mtg. on it with the original owner, can the buyer on a CD claim the Mtg. Int. Tax Deduction?
Thank you.
Chris
Let's keep it simple. A seller has sold his property to a buyer on contract for deed. The contract has a market interest rate. A contract for deed is an installment sale. The seller will report a portion of the buyer's payments as a return of basis, a portion as taxable profit (capital gain), and a portion as interest income.
If the seller owned the property free and clear. Then the interest received from the buyer is ordinary income. The seller must give the buyer a 1098 or equivalent every year so the buyer can take the home mortgage interest deduction.
If the seller has an underlying mortgage, then the buyer still gets a 1098 for the full amount of interest the buyer paid during the year. The seller reports the interest received from the buyer as income and offsets it with the mortgage interest he paid on the underlying loan. Effectively, the seller is taxed on the interest spread.
In both scenarios above, the seller will also pay capital gains tax on the portion of the buyer's payments that represent profit on the sale of the property. The portion of the buyer's payments that is a return of basis is not taxed.
If the property was an investment property with unrecaptured depreciation, then the unrecaptured depreciation is taxed in full in the year of the sale.
If a buyer is paying interest then yes they can. If they have a contract for purchase they have a finance interest in the property. That said if the original owner was paying interest that would be an expense for them. So they would only pay tax on the spread.
@Steven Hamilton II-Not sure I understand the answer. Ok, 1st ?: If original owner does NOT have a mtg., the house is owned free and clear, when I sell the the new buyer, on a 30 year am. @ 6%, can he/she claim the mtg. int. tax deduction? 2nd ?: If the original owner has a mtg w/ a rate of 5%, and I sell on a CD w/ rate of 6%, then can the new buyer claim the "FULL" mtg. int. tax deduction?
Thank you.
Let's keep it simple. A seller has sold his property to a buyer on contract for deed. The contract has a market interest rate. A contract for deed is an installment sale. The seller will report a portion of the buyer's payments as a return of basis, a portion as taxable profit (capital gain), and a portion as interest income.
If the seller owned the property free and clear. Then the interest received from the buyer is ordinary income. The seller must give the buyer a 1098 or equivalent every year so the buyer can take the home mortgage interest deduction.
If the seller has an underlying mortgage, then the buyer still gets a 1098 for the full amount of interest the buyer paid during the year. The seller reports the interest received from the buyer as income and offsets it with the mortgage interest he paid on the underlying loan. Effectively, the seller is taxed on the interest spread.
In both scenarios above, the seller will also pay capital gains tax on the portion of the buyer's payments that represent profit on the sale of the property. The portion of the buyer's payments that is a return of basis is not taxed.
If the property was an investment property with unrecaptured depreciation, then the unrecaptured depreciation is taxed in full in the year of the sale.
First, I really do appreciate the detailed response. 2nd; in the scenario where there is a mtg. on the house, let's say at 5%, with the original owner, and the buyer signs a CD at 6%, the buyer "DOES" get to claim that mtg. int. tax deduction?
Thank you in advance.
Chris
To answer your question. YES they can definitely deduct the mortgage interest they are paying. This means that both the buyer and the seller will have deductions for interest.
The seller will take that as Investment interest on Form 4952.
The buyer will be able to deduct it on the appropriate form(Schedule A, C, E, etc) based upon the use of the property.
A question for you off topic: How far is Burnsville from St Paul?
If the existing mtg. for the original owner is 5% and the rate on the CD for the tenant buyer is 6%, does the tenant buyer get to deduct the full 6% or the difference, or only 1% ?
Thank you.
The tenant / buyer has no clue of what the seller's interest rate is, and so the seller's interest rate has no bearing on the tenant / buyer's tax deduction. So the tenant buyer gets to deduct the full amount of dollars paid into interest (percentage is irrelevant for tax purposes here).