How do I claim income from the satisfaction of a mortgage that I held on property?

[rick42nc]

I took a second mortgage on my home when I sold it to my Brother and Sister in Law in 1997. They made nornal payments for 10 months, then they got divorced a few months later. The ex-brother in law kept the house by their divorce decree. He quit making regular payments and made sporadic payments up until 2021 when I told him I needed him to pay it off or start makng payments or face forclosure.

At the time he owed $11,063 in unpaid princial, interest and late fees. I made him an offer to settle the account and I would clear the mortgage for $7000.  He agreed and we did so. Question, where do I claim this income and loss on my tax form. I have turbotax deluxe.

[DianeW777]

This would have been considered an installment sale at the time it began in 1997, so some clarification as to whether this was reported at that time might be helpful.  If I assume you never reported the sale due to a misunderstanding of the requirements, then you would report the sale now if there is a gain.  If there is a loss on the sale then a personal loss is not deductible.  You should keep all of the records.

If you did receive a Form 1099-S reporting the gross proceeds of the sale, then you should determine your cost in the home (includes original purchase price, capital improvements (something that increases the value but not such things as painting or repairs), and the cost of purchase and sale if applicable. Indicate it was a personal sale when TurboTax asks you.

If there was no interest stated in the contract when you originally sold the property on installment, then a portion of your payments would be considered interest income and not principal payments. 

Per the IRS: You generally report interest on an installment sale as ordinary income in the same manner as any other interest income. If the installment sales contract doesn't provide for adequate stated interest, part of the stated principal may be recharacterized as unstated interest or original issue discount for tax purposes, even if you have a loss. You must use the applicable federal rate (AFR) to figure the amount of stated principal recharacterized as unstated interest or original issue discount. The AFRs are published monthly in the Index of Applicable Federal Rates (AFR) Rulings.

• For more information on installment sales you can use the links below.
  • IRS Publication 537 - Installment Sales
  • What is an installment sale?

[rick42nc]

Dianne, thanks for the information but I think I did not explain this well. This should have been an installment payment plan but I never received payments so I never claimed this on my taxes. I finally got fed up with waiting on the money so I gave my brother-in-law an ultimatum to pay up or I would file for foreclosure. When I did this he owed me well over $14000 for a loan of $7500. I am not heartless so I told him we would call it even if he pid me $7000. He did that and now I need to know how to claim this. Since payments did not go as scheduled and he paid me back less than I loaned him I am thinking that it would be no different than if I lent him $100 and he only had $70 so I accepted this as satisfaction on the $100. I may be way off on this but I am still not understanding on how to claim this. If the amount were not so much I would not even think about even claiming it, Thanks for the help.

[DianeW777]

There may be nothing to claim or report, it would be scrutinized by the IRS because it was a relative which may be viewed as a personal loss which is not allowed to be used to offset other income on your tax return.  

Some other facts and circumstances that could come into consideration on your part.

IRS is likely to question any non-business bad debt very closely and especially in the case of a debt to a relative. You will need to be able to show that the loan was made in a professional manner, that you had appropriate paperwork, following a payment schedule, that you were reporting any interest payments as income, and so on (neither of the latter took place for you).  You are also going to have to show that you made diligent efforts to collect the debt such as legal action and documentation.

If you do not have the necessary backup then you should not take a bad debt entry on your tax return.