My father in law sold a house (for sale by owner) and listed us as beneficiary of the monthly mortgage payment. So we now get a monthly payment in which we have to pay insurance and property taxes wit

[Irene2805]

Your question was cut off.  Could you please submit additional information on your question?  Thanks!

[Andrewhickam]

We have to pay property taxes and insurance out of monthly payments and then the rest is ours to keep. I want to know if this needs to be reported as income and if yes how do I do that because it is not our house.

[Hal_Al]

Short answer: This situation is too complicated for do-it-yourself tax preparation.

From IRS Publication 537: A gift of an installment obligation is a disposition. Your gain or loss is the difference between your basis in the obligation and its FMV at the time you make the gift.

What does your father-in-law  say about taxes?  Generally,  one of you needs to report it.  If it was the sale of his  primary residence, he most likely excluded the capital gain from his tax return in the year of the sale. 

It sounds like your father-in-law has made an installment sale.  If he excluded the gain, only the interest needs to be reported as income. If it was not the sale of his residence, then a portion of the capital gain needs to be reported each year. 

You do not get to reduce the taxable income by the insurance and property tax paid. The insurance payments are not deductible.  The property taxes  are deductible as an itemized deduction.

[Andrewhickam]

So we had nothing to do with the sale, so that tax is on my father in law, correct? So can I report the house payments that we are receiving as extra income for us or is it more complicated than that?

[Hal_Al]

It's more complicated than that.

[gloriah5200]

Unfortunately, if you received the payments due to being listed as beneficiary, then your father-in-law must have passed away.  You must include the income on your return. 

The interest received is considered installment interest income on Schedule B and the principal payments are considered installment sale income (Form from principal going first to Form 6252 and then to either  4797 and then to Schedule D or straight to Schedule D, depending on the use of the property sold). 

Refer to the father-in-law's prior year income tax return to find his gross profit percentage received to be reported on his Form 6252  and then carried to the other forms on his return and guiding you how to report on your return.

You are considered as having inherited the installment sale contract from your father-in-law and are able to use his remaining cost basis of the installment sale against the remainder of the payments to reduce your tax on them. You will claim it on your return because you received the money (and the contract was inherited by you) and it was not taxed on your father-in-law's return yet until it is received, which is after his death.

Publication 537 has not yet been updated by IRS, so you will have to use the information provided currently in the 2019 Pub 537.

The transfer of an installment obligation as a result of the death of the seller isn’t a disposition. You did not sell the property, just received the installment payments. Any unreported gain from the installment obligation isn’t treated as gross income to the decedent. No income is reported on the decedent's return due to the transfer. Whoever receives the installment obligation as a result of the seller's death is taxed on the installment payments the same as the seller would have been had the seller lived to receive the payments.

Refer to the following from IRS Pub 537 regarding transfer of installment income

[Andrewhickam]

So my father in law is still alive. But we are listed as beneficiaries on the contract and the payments are coming straight to us. So does that apply since he hasn't passed yet?

[Critter-3]

I am trying to wrap my head around the idea that the property was sold  but YOU still need to pay the RE taxes and insurance on a property you don't own ???    Seek local professional assistance to be educated on what you have and what you need  to do about it.  

[Hal_Al]

@Andrewhickam 

Was the house,  that was sold, your father-in-laws primary residence? If so, was the gain more than the exclusion amount?   Did he report the sale, as a home sale, and claim the exclusion, on his tax return for the year sold?  If not his home, did he pay tax on the gain in the year it was sold? That is, has the taxable part of the gain already been accounted for?

If not, was it his intent to pass the tax obligation to you, both capital gains and mortgage interest.  The insurance payments are not deductible and the real estate tax is only deductible as an itemized deduction.

Is there an amortization schedule with the buyer? That is how much of the money you received is interest and principal.

Even if you go to a tax professional, you need to have answers to theses questions.  

[Andrewhickam]

It is not his primary residence and there is an amortization schedule.

Is there any other questions, I need to know answers to?

I'm really frustrated and afraid that even going to a professional there is going to be tons of confusion. Will a professional be able to sort this out with no problems?

[Hal_Al]

What kind of house was it? A rental would involve depreciation recapture. 

Did he pay tax on the gain in the year it was sold? That is, has the taxable part of the gain already been accounted for?

If not, was it his intent to pass the tax obligation to you, both capital gains and mortgage interest.  The insurance payments are not deductible and the real estate tax is only deductible as an itemized deduction.

[Andrewhickam]

It was a rental. I have no clue on the other. It was sold Jan. 2020. 

Say that he did pay the tax on the gain, what would we need to do?

[Hal_Al]

Q. Say that he did pay the tax on the gain, what would we need to do?

A. Using the amortization schedule, you report the interest income only.  

[Hal_Al]

It was sold Jan 2020?

That indicates that the tax reporting hasn't been done yet.  You should be discussing that with your F-I-L.