Received interest fr wrap sale. Not receiving any $ for sale, loss on property. lender receives all $ from buyer. Where do I report interest income to us?

[DianeW]

Interest income is reported on your return as follows assuming this is a sale where you the seller finance a junior mortgage. 

• The seller extends to the buyer a junior mortgage which wraps around and exists in addition to any superior mortgages already secured by the property

• While you are logged into your TurboTax Premier account:
• Federal Taxes tab
• Select Wages & Income
• Select I'll choose what I work on
• Scroll to Interest Income
• Select Interest from seller financed loans 
• Continue to enter the information -Name, address and social security number of the buyer
• Click the screenshot attached to enlarge and view for assistance.

When you hold a note between you and the buyer interest income is reported regardless of gain or loss on the sale.

[dimar1111]

What if we are making no money on this deal? Their payment goes directly to the lender. Is this the area to report it on? Thank you

[DianeW]

The interest would still be considered income to you in the wrap even though it's paid directly to the bank.  You are liable for the loan and the payments are being made on your behalf directly instead of coming through you.

[dimar1111]

why is the servicing agency "recipient's name & tax id" showing on the 1098 form? Shouldn't it be my #/name?

[Pankaj]

Thanks for bringing up WRAP mortgage interest income question? I am doing my first WRAP mortgage interest income through my LLC. 

My note servicing company issued 1099 INT which indicates interest income ($8K) which is higher than the actual interest income ($2K) received from the end buyer. It seems like note servicing company is most likely reporting underlying mortgage interest income ($6K). 

How do I report actual interest income ($2K) under Interest income? In other words, where can I deduct underlying mortgage interest income ( as an expense)?

Thank you in advance for your help.  

[Anonymous]

Generally in a wraparound mortgage, the seller recognizes interest income via schedule B on the note they hold and issues a 1098, and then deducts the interest paid as investment interest on the underlying mortgage via Schedule A. This is referenced in IRS Publication 936 & IRC Section 453.

[Pankaj]

When I am deducting  investment interest on the underlying mortgage via Schedule A, what items are allowed:

1. Mortgage interest 
2. late charge and fees incurred
3. Can I deduct principle paydown payment? I am not sure that.
4. Escrow account is with Underlying mortgage. I don't think I can deduct escrow payment made by endbuyer like Mortgage Insurance premiums, property taxes and insurance. Correct!

As I was reading IRS pub 936 and IRC Sec 453, I came across IRS Publication 537 (Installment Sales). I am not sure my real estate wrap around transaction follows Pub 537. I purchase wrap-around mortgage note from another company. My LLC did not sell the property with an installment note. Let me know expert thoughts thanks

[Anonymous]

investment interest is exactly that interest paid on property held for investment. principal payments aren't interest expense and neither are escrow transactions.  late charges and fees are probably not interest.