Posted by Diane (TX) on November 07, 2002 at 18:12:31:
Yes, you have to pay taxes on the 9% interest you are getting. You can deduct the 10% interest you are paying.
There are two pieces here. The first piece is the sale of the property. That’s the $48K. You can exclude gain on this piece, but you can’t deduct a loss.
The second piece is the note. The note arose from the sale, but it’s treated separately from the sale. (If you’re thinking of installment sale treatment, that doesn’t apply to losses, only gains.) The note generates interest income. The interest expense would probably be investment interest expense (itemized deduction).
I sold a house on a contract for deed basis. I still pay the original mortgage that has 10% interest. The buyer paid me a steeply discounted sales price of 48k, but agreed to pay me 9% interest so I could recoup my money in this property over the long haul of the next 15 years.
The total I will get back is about 60k and that is about what I have in it. Since it was my primary residence, and I am allowed 250k gain, and I am breaking even, do I have to pay taxes to the IRS on the 9% interest I am getting yearly? I am not making any money on the sale .