What are the Tax Consequences of a Contract for Deed?
The Internal Revenue Service recognizes contract for deed transactions as a sale; allowing buyers to deduct mortgage interest. Sellers are required to report contract for deed transactions as installment sales and can no longer obtain tax benefits associated with the property.
Usually, a seller will provide his buyer with a payment schedule that details how much interest, in dollar figures, the buyer pays each month. This information can be used when a buyer prepares his or her income taxes.
When filing income taxes, a homeowner buying his house on contract will refer to the payment schedule provided to him by his seller to figure the amount of interest he paid on his contract for deed the previous year. Some, if not a significant portion, of that interest can be written off as an expense at tax time. This is usually permitted by the IRS, providing that contract for deed has been recorded and is secured by real property. The seller may wish to provide the buyer with an IRS Form 1098, although it is usually not required.