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Author: honeydog Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121180  
Subject: 'Contract to Purchase', interest deductible? Date: 1/6/2000 11:16 AM
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Unlike conventional mortgages, house title does not pass to borrower until note paid off. Meanwhile, can borrower deduct interest paid as 'mortgage interest'as itemized deduction? Also, does IRA require lender to submit 1098 statements to lender and IRS?

Honeydoe
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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24539 of 121180
Subject: Re: 'Contract to Purchase', interest deductible? Date: 1/6/2000 3:12 PM
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Unlike conventional mortgages, house title does not pass to borrower until note paid off. Meanwhile, can borrower deduct interest paid as 'mortgage interest'as itemized deduction? Also, does IRA require lender to submit 1098 statements to lender and IRS?

My gut reaction is that if this is in substance the same as a traditional mortgage and purchase, then the interest called for in a "contract to purchase" would be mortgage interest and deductible.

Not much of an answer, but I hope it helps.

--ptheland

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24565 of 121180
Subject: Re: 'Contract to Purchase', interest deductible? Date: 1/6/2000 4:47 PM
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<<Unlike conventional mortgages, house title does not pass to borrower until note paid off. Meanwhile, can borrower deduct interest paid as 'mortgage interest'as itemized deduction? Also, does IRA require lender to submit 1098 statements to lender and IRS?>>

This is also known as a "wrap around" mortgage. And they can get a bit complicated. You'll really want to read IRS Publication 936 for additional information.

But you can deduct your home mortgage interest only if your mortgage is a secured debt. A secured debt is one in which you sign an instrument (such as a mortgage, deed of trust, or land contract) that:

1) Makes your ownership in a qualified home security for payment of the debt,

2) Provides, in case of default, that your home could satisfy the debt, and

3) Is recorded or is otherwise perfected under any state or local law that applies.

In other words, your mortgage is a secured debt if you put your home up as collateral to protect the interests of the lender. If you cannot pay the debt, your home can then serve as payment to the lender to satisfy (pay) the debt.

As regarding the Form 1098, yes...the person who you are making the contract payments to should send you Form 1098 on an annual basis (assuming that you are actually paying mortgage interest based upon the rules noted above).

Hope this helps...
TMF Taxes
Roy




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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24577 of 121180
Subject: Re: 'Contract to Purchase', interest deductible? Date: 1/6/2000 10:40 PM
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TMFTaxes:

[Prior poster] <<Unlike conventional mortgages, house title does not pass to borrower until note paid off. Meanwhile, can borrower deduct interest paid as 'mortgage interest'as itemized deduction? Also, does IRA require lender to submit 1098 statements to lender and IRS?>>

"This is also known as a "wrap around" mortgage. And they can get a bit complicated. You'll really want to read IRS Publication 936 for additional information."

I almost never disagree with Roy, but a contract for deed is not a wrap mortgage in the sense that any real estate person uses the term wrap mortgage.

The original poster is correct in his description of a contract for deed. The seller retains title to the house until the contract is fully paid. NOTE - the law generally disfavors contracts for deed because the penalty is so harsh forfeiture, even if the buyer has paid 118 out of 120 payments. The buyer typically signs neither a note nor a mortgage/deed of trust.

I have no idea whether "interest" on a contract for deed is deductible or not. I would never advise a client to buy on contract for deed, and I have been fortunate not to represent sellers who want to sell by contract for deed. I understand that contracts for deeds may have theiry place, but I think of them as being slightly disreputable, BWDIK.

In a wrap mortgage situtation, the buyer actually acquires title, and executes a new mortgage to the seller that is larger that includes both the net equity amount that is being purchased, and also includes the amount of any outstanding mortgages (usually at a higher interest rate than the existing mortgages but less than a true second mortgage) and the seller obligates itself, by covenant, to pay the existing mortgage. The benefit to the seller is that the seller obtains the full interest rate on the "second"/equity portion of the debt plus the spread between the interest rate on the wrap mortgage on the amount of the existing debt. The benefit to the buyer is that the total interst cost is less than if the buyer went out and got a new mortgage for the total amount financed. Wrap mortgages really only work when (i) any existing mortgage does not have a due on sale or due on encumbrance clause and (ii) interest rates have risen since the existing mortgage was taken out.

An example may make this easier to understand. Existing building owned by A with 60k mortgage outstanding @ 6% and 100k FMV. B buys the building for 100k, paying 10k in cash, and executing a wrap mortgage for 90k @ 8.5%, payable to A, who obligates himself to continue paying the existing mortgage. A earns 8.5% interest on 30k (90k new mortgage - 60k existing mortgage + 2.5% (8.5% new mortgage - 6% existing mortgage) on 60k of existing mortgage. This also works for B so long as B cannot get a new 90k mortgage for a net 8.5% or less, including all transaction costs (which will probably be higher for a new lender than those of the existing building owner/seller).

I have not seen many wrap mortgages in the last decade, but they were not uncommon in the mid-80's. I amy not know alot about taxes, but certain real estate issues are in my backyard.

Just my $0.02. Regards, JAFO

Disclaimer

Yes, I am a lawyer, BUT THIS IS NOT LEGAL ADVICE; it is only general information. NO CLIENT RELATIONSHIP IS INTENDED TO BE CREATED, NOR IS ANY SUCH RELATIONSHIP SO CREATED. FOR SPECIFIC LEGAL ADVICE YOU SHOULD TALK TO A LAWYER IN YOUR AREA.




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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24580 of 121180
Subject: Re: 'Contract to Purchase', interest deductible? Date: 1/7/2000 12:09 AM
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Thanks, JAFO, for clearing that up for me. It makes me quite a bit less sure about my prior suggestion that this could be mortgage interest. To be deductible, mortgage interest must be secured by the residence. Since it sounds like that is not the case here, the interest is probably not deductible. There may be some obscure bit of tax law that says this arrangement is OK, but using the general principles, it looks doubtful.

--Peter

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Author: vargaj Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24587 of 121180
Subject: Re: 'Contract to Purchase', interest deductible? Date: 1/7/2000 10:53 AM
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Such interest IS deductible. Although there is no "mortgage " in the conventional sense. The loan is SECURED by the land. The interest IS deductible. The issued has been settled a long time ago.

Joe Varga

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24635 of 121180
Subject: Re: 'Contract to Purchase', interest deductible? Date: 1/8/2000 7:04 PM
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The original poster said...
<<Unlike conventional mortgages, house title does not pass to borrower until note paid off. Meanwhile, can borrower deduct interest paid as 'mortgage interest'as itemized deduction? Also, does IRA require lender to submit 1098 statements to lender and IRS?>>

And then...TMF Taxes said....

<<"This is also known as a "wrap around" mortgage. And they can get a bit complicated. You'll really want to read IRS Publication 936 for additional information.">>

And then JAFO responded...

<<I almost never disagree with Roy, but a contract for deed is not a wrap mortgage in the sense that any real estate person uses the term wrap mortgage.>>

And TMF Taxes responds...

But I appreciate it ANYTIME you'd like to correct me, JAFO...especially when I SCREAM to be corrected!! :-)

As you note, I was WAY OFF BASE with my characterization of a land contract also being known as a "wrap around" mortgage. I've obviously used those terms too losely in the past, but (hopefully) won't make that mistake in the future.

I've printed out your response and placed it in my stack of reference material. I appreciate now knowing the real legal differences. Thanks for taking the time to point out the error of my ways, and to provide the readership with the actual legal difference between a "contract" and a "wrap".

Again...it's much appreciated.

TMF Taxes
Roy



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