Sale of Seller Financed Mortgage

[MargaretMort]

Don't quite know how to title this one.

Brothers had a piece of property, sold it and financed the mortgage. Each one reported half the interest and principal paid on own tax return each year. This year each one needed some extra money so their father bought the mortgage from them. He did not pay the entire remainder of the mortgage. My understanding is that he gave them the piece of land in the first place so there is no capital loss.

Am I correct in showing the purchase amount in Other Income?

As always, I appreciate any and all help. MM

I am now doing Father's return and it dawned on me that I have no idea how to do the 6252. Nothing has changed as far as original sale and payments in the past. Do I simply input, probably over-riding things, what has gone on in the past? To my way of thinking he is simply collecting the mortgage and paying the taxes on the income, the amount he paid his sons is immaterial.ARGH!!

Can't decide if I am in the throes of terminal brain fatigue or simply over thinking things

[Maribeth]

The brothers had a financial document. What they sold to their father was that financial document. The father needs to determine what he purchased from the brothers.

Example: B has a contract with a face amount of 10,000. F buys that contract from B for 8,000. F will recognize 2,000 in proft as the contract is paid off. F will also recognize interest on the contract as it is paid off.

Maribeth

[kcjenkins]

The sticking point in this situation is that the note for the property was from the father, then the father bought HIS OWN NOTE BACK, so I see this as a finalizing of the installment sale. Let's say the balance on the note was $10K and he paid $8K for it. The son's simply collected $4K each for the balance of the sale. Which amounts to an adjustment of the sales price down $2K. If you read Pub 537 it will give you examples of how to show this.

As for the father, his basis will be what he actually paid on the principle of the note for the land. Ignoring the fact that this seems like a bit of a sham transaction, given that Dad owned the land in the first place, gave it to them so that he could buy it back from them.........I wonder if this was his residence and he sold it to them to take advantage of the exclusion of gain and end up with it back with a higher basis?

[MargaretMort]

I am sorry, I misled you, K.C. The father gave/sold his sons a piece of property. The sons sold the property in 2004 and have been showing the principal and interest since. In Sept 2010 Dad bought the mortgage from the sons. Each son will report the principal and interest paid until Sept. My thoughts are that I will report what Dad paid son as other income and Dad will report the principal and interest from then on until the mortgage is paid off.

I am not sure if I am clear yet or not. My brain isn't fried but it is working on it.

Thanks for any and all help. MM

[grandmabee]

the sons sold the note at discount. there is a worksheet to figure the new taxable amount for the 6252 which would be paid off. the dad basis in a note would be what ever he paid for it. interest is taxable I think its just like if a mortgage broker purchase it.

[kcjenkins]

Oh, OK, I see, the sons sold it to a third party [call him X] on an installment basis, and were reporting the income as the note was paid. Then, needing cash, they sold X's note to Dad.

Use the worksheet to calculate the taxable gain, and for the sons this is the last of it. Dad's basis in the note is what he paid for it, so he will have some interest income and some capital gain income from the payments as he receives them.

[MargaretMort]

Many thanks for all the help. The advice finally percolated through my brain and I did the son's correctly yesterday and finished that return--YEAH! Dad's is being reworked in a few minutes so I can chalk another one up to the good guys. MM

[jainen]

>>Use the worksheet to calculate the taxable gain<<

The worksheet in Pub 537 is for a reduction in selling price, but on page 11 it specifically says not to treat a disposition of the installment obligation that way. Instead, simply apply the original gross profit percentage as if the note had been paid off. The text explains how to determine basis for this purpose.

>> Dad... will have some interest income and some capital gain<<

I don't know where to look that up--do you have a reference? I'm pretty sure an investor who buys an installment note does not report it the same way. I think it is more like OID in his hands.