Seller Financed Mortgage

[Christian]

A client has come in with three properties he is buying directly from the owner. He plans setting them up as rentals and ,of course, wants to deduct his expenses even though he has not received any rental income as yet. As these payments are made to private individuals do we as practitioners have to attach a statement listing the individuals name and social security number with the amount of interest paid to each ? Is this required for him to claim the interest payments on his Schedule E forms and if not included will the Service simply disallow the amounts claimed as interest ?

[Yardley CPA]

Christian...I believe you're correct, you need to included the name, address and SSN of the seller. I had a client who obtained a seller financed mortgage for their personal home. I indluded the individuals name, address and SSN on line 11 of Schedule A. I assume it would be similar for a Schedule E.

[JohnH]

_{I have filed Schedule E with the interest deducted on Line 13 and no attachment.}

_{Never heard a word back about it.}

_{But I've always kept notes in my files documenting the reason it was handled this way.}

_{The Schedule E instructions for Line 13 are a little vague.}

_{They address the fact that an attachment is needed when a 1098 is issued to a different person, but they are silent on whether an attachment is needed for seller-financed mortgages.}

[Christian]

My feeling about this is that it will pass muster without the seller info. I am sure the client will not want to obtain it and equally sure the sellers would prefer not having to list it on their Schedule B's. None of these properties are going to show any rental income for this past year. It just occurred to me that it might be MANDATORY since there will be no 1098 forms from any financial institution.

[JohnH]

Well, that's a different issue.

Whether or not the sellers want to break the law isn't really a factor in the decision on how to prepare your client's return, is it?

Although if your client is inclined to help them cheat might be important info for you in the future.

What else might the client be willing to do WITHOUT telling you, just because it benefits him or someone he wants to impress?

And who might be the first person the client would throw under the bus if IRS comes calling?

After all, at that point he will still have an obligation to pay for the rental property to those same sellers, but there are plenty of tax preparers out there...

[Abby Normal]

A schedule E should file a 1099-INT to the recipient of the interest income.

[Christian]

Your point is well made John. My question involved whether it was mandatory for him to report these individuals and I can find nothing in the Scehdule E instructions which specifically requires it. As a precaution I'll require him to furnish me a list of these folks with names and socials just in case the Service comes calling. I'll need to prepare him three 1040-INT forms as well . That way I am in the clear.

[JohnH]

Yes, if you do things correctly on your end, then what he does with the 1099-INT forms is entirely up to him.

[kcjenkins]

Your point is well made John. My question involved whether it was mandatory for him to report these individuals and I can find nothing in the Scehdule E instructions which specifically requires it. As a precaution I'll require him to furnish me a list of these folks with names and socials just in case the Service comes calling. I'll need to prepare him three 1040-INT forms as well . That way I am in the clear.

Keep in mind that when it comes to mortgage interest, it is seldom a problem because the sellers already KNOW the buyer will be deducting the mortgage interest.

[joanmcq]

The sellers are likely structuring this as an installment sale (if sold at a gain), or should be. Interest will be looked for on the return.