You did receive $12,756.57 of interest, and you have to report that amount as interest income. You used $10,435.65 of the interest that you received to make the payments on your mortgage. The buyer did not make your mortgage payments. The buyer paid you. It's the same as if you took $10,435.65 from your salary to make your mortgage payments. You would still have to pay tax on the full salary that you received.
