Home Sold Under Land Contract

[Patrick Michael]

New client sold a home using a land contract in 2010. Client still has a mortgage on the property and has been making the mortgage payments. Former preparer had been using Schedule E listing the payments from the buyer as rental income and then deducting the mortgage interest, property taxes and homeowners insurance payments (all payments made by the client, the seller) along with depreciation. Never dealt with a land contract before and my research leads me to believe this should have been handled as an installment sale on form 6252 with the interest received being reported on Schedule B and the interest paid on the mortgage deducted on Schedule A as investment interest expense. But I can not find anything on how to handle the real estate taxes and homeowners insurance. My feeling is, since the sellers are still the legal owners of the house and obligated to make the tax payments, they should be able to deduct them as real estate taxes on Schedule A and the homeowners insurance is a personal expense and not deductible.

Am I missing anything?

And should amended returns be filed back to 2010 even though the statute of limitations has past for 2010 and 2011? Are the returns considered to be a "false or fraudulent return" even if the tax payer had no idea they were wrong?

Thanks.

[RitaB]

My opinion is you are spot on and I'd suggest to the client to amend returns back to 2010.  Of course, the client is gonna want to know what difference it will make.  That's when I'd say, "I can't tell you that without doing the returns, so it's entirely up to you.  I will tell you that the returns filed 2010 - 2014 are incorrect and I would amend them if they were mine."  I would not discuss whether or not IRS will issue refunds back that far.  The returns were incorrect and should be corrected, and that's all I'd say. 

Yes, the responsibility for the accuracy of the returns rests with the taxpayer.  I'd tell him that, too.  90% of my clients don't have a clue if their return is correct.   The odds of a taxpayer with an installment sale understanding a tax return approaches zero, in my opinion.

[DANRVAN]

Have you seen a copy of the sales contract?  Could be some sort of rent with option to buy. Best to get the whole picture before you jump in. Why is seller still paying property taxes and original mortgage?

[Terry D EA]

I agree with Rita. I think you hit it spot on. However, the rent with option to buy is a possibility as well. I would suggest you check the sales contract as well to be sure and if it is not an option of rent to buy, the proceed as you have stated.

[WITAXLADY]

and will probably will owe... not a refund

[Patrick Michael]

I read the contract and it's definitely a land contract, not a rent to own.  And I also believe they will owe since they were depreciating the property.

Thanks for the replies.  As a one man show it's nice to have so many knowledgeable people to bounce things off of.