Yes, you need to send Form 1098, Mortgage Interest Statement, to report interest of $600 or more you received during the year in the course of your trade or business from an individual, including a sole proprietor.
You would report the interest received from the individual financed. The interest is considered income and it is necessary to report this income annually on the lender's taxes, as is required with any other annual income. The interest income will be reported on Schedule B on your return.
I am not sure what expense you would incur. Can you be more specific regarding expenses?
