How to report sale of personal residence under contract for deed

[artp]

IL taxpayer (single) sold personal residence for $ 150,000 under contract for deed in Sept 2013 receiving a down payment of $15,000 and took back a 30 year 5.5% note with a 5 year balloon. She purchased the home in 2003 and used it as her personal residence unit Nov 2011 when she acquired a new residence. She had attempted to sell the old home, but could not find a buyer to do a straight sale and finally had to do the contract for deed. Taxpayer still has a mortgage on the property and continues to make her loan payments. Taxpayer meets the 2 out 5 year rule and the gain is less than $250,000.

Question 1

Does this qualify as a 2013 "sale" for purposed of the Sec 121 exclusion with the result that she only needs to report the interest income on note payments from the buyer?

Question 2

Is the interest she pays on her mortgage on the old home deductible on Schedule A?

[Terry D EA]

Check Pub 523. I think this sale will fall under the 121 exclusion. If the buyer under contract fails to follow thru or if this was an option to buy and the option is not exercised, then your client would claim amounts received as taxable income plus the interest received. Unitl such time only interest should be reported and yes your client is allowed to continue to deduct the mortgage interest paid on Sch A.

[artp]

Thanks Terry.

I started working on this very late last night and I did not see this in Pub 523. I will check again this morning.

Art

[artp]

Terry,

Pub 523 and TC case Keith 115 TC 605 (referenced by another preparer) support the position that the contract for deed is a completed sale under state law.

But the deductibility of the interest expense on Schedule A still bothers me. Since she no longer lives there, it is not her personal residence. So how does it meet the test to be a "qualified home" ? The only thing I see is if you can fit it in as "second home not rented out." Since she still has legal title to the home (the buyer only has an "equitable interest" in the home) and she is not renting it out or holding it out for sale, she does not have to use the home herself. Does this meet the test or is there something else that I as missing here?

[Terry D EA]

The interest is paid by her and most likely will be listed as paid under her SS#. Therefore, I say she can still take the deduction just as you say simply as a second home. I mean really what is the difference?

[artp]

You are correct as long as the interest expense she is paying out is not greater than the interest income she is receiving on the note from the buyer.