Interest we paid on loan for property we sold with an installment loan

[farmerdavek]

We flipped a home and sold it with an installment loan. We are making payments on the original loan we used to purchase the property. Can we deduct the interest to offset some of the installment loan interest, and if so, how do we report it in TurboTax?

Thanks

Dave

[DianeW777 · Accepted solution]

No.  The home is not your residence, therefore you cannot deduct the mortgage interest on your tax return.  The installment loan is reported showing principal and interest payments you received during the year.  

Per IRS Publication 936, the following information is important.

The interest you pay on a mortgage on a home other than your main or second home may be deductible if the proceeds of the loan were used for business, investment, or other deductible purposes. Otherwise, it is considered personal interest and isn't deductible.

• Second home not rented out. If you have a second home that you don’t hold out for rent or resale to others at any time during the year, you can treat it as a qualified home. You don't have to use the home during the year.  (It's already sold).

• Sale of home. If you sell your home, you can deduct your home mortgage interest (subject to any limits that apply) paid up to, but not including, the date of the sale.

[farmerdavek]

A belated thank you for your response. 

I have another issue to address now. We sold my father-in-law's home in 2020 to an acquaintance who needed a few months to apply for a mortgage. We agreed to a 10% down payment and to accept principal payments for up to twelve months. After 18 months, they defaulted on the agreement and we sold the home again, in 2022. On our 2020 tax return I listed the full sales price of $160k with a basis of $160k, which is the amount the inheritance tax was based on. Do I need to go back and amend returns for 2020 and 2021 to reflect the payments made or can I just add it all together on our 2022 return? It is my understanding that any amount over the basis price of $160k is subject to capital gains. 

Thanks

Dave

[DianeW777 · Accepted solution]

There are the payments received for the original sale less any expenses paid to cancel the agreement. Please clarify if necessary.

Gain or loss on repossession is determined by subtracting the seller's basis and any repossession expenses from the fair market value (FMV) on the date of repossession.  The gain to be reported on the repossession of real property can never exceed the original sale price minus 

(1) your original basis in the property, (FMV for you as stated $160,000)

(2) the gain you recognized, (no gain was recognized on your 2020 return)

(3) your expenses of repossession.

• Based on this you have no taxable gain to report however any payments must adjust the basis for the second sale.

For 2022, you would reduce the cost basis by the amounts you received under the original agreement and increase it by any fees to take it back after default. 

Once you have reduced the cost basis, use this to report the sale on your 2022 tax return. (Example: $160,000 - $16,000 (10% payment) + repossession fees = New Cost Basis)

• Where do I enter investment sales?  

@farmerdavek 

[farmerdavek]

Great, that was the way I was heading. My other concern is that our lawyer submitted a 1099-S for each sale, and I wasn't sure if that would raise any red flags given that there are two sales for the same property in different years.

[RobertB4444 · Accepted solution]

No, no red flags as long as you report it all.  You aren't the first person to go through a repossession.  So the IRS will get it.

@farmerdavek 

[farmerdavek]

Thank you, Diane and Robert.