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I have to go back and refile (amend) my 2005, 2006, 2007, 2008 taxes anyway: a conditional sale, where the buyer walked away after three years (“undoing” the sale, and re-characterizing the payments), a real-estate partnership that was (retroactively) abandoned by my brother, and a K-1 I didn’t get until it was 18 months late. I’m trying to keep these tax returns as “straight-forward” as possible for pending commercial loan purposes.

I have a very similar situation to this post:

I sold rental property in 2006 using a wraparound mortgage, aka AITD (All Inclusive Trust Deed). The contract was also actually a conditional sale (lease option), but it had higher than normal "security down" and we wanted buyers to assume expenses, so we have been treating, and reporting, as a sale.

I reported sale as an installment sale. Buyers are paying interest only payments on a larger principal amount than my existing note, so I am slightly cash positive every month, and they have not paid any principal yet. Buyers are designees for all real property rights: they pay taxes, insurance, repairs, etc. I am still receiving 1098 Mortgage Interest Statements from my bank, and an escrow company issues me a 1099-INT for my installment sale interest (I'm assuming they're issuing 1098's to buyers; buyers are both real-estate agents with extensive real-estate activity, so they are possibly Schedule C reporting, not Schedule E reporting).

I do maintain my own reserves for the mortgage and property taxes, handle and forward property tax paperwork (in my name), contact insurance company every six months to get and forward buyer's proof-of-insurance to my bank, etc.

Is there ANY argument for being able to keep this property's interest income and interest expense on a Schedule E (with my other properties)? Obviously no other property expenses would be mine. This would be, by far, the most desirable course.

If not, could I consider this a lease, until they actually take title, THEN re-characterize the payments as interest. It is a stretch considering all the purchase provisions we made in the contract, but they did NOT take title, nor are there any recordings, until the contract terms are met. (This would have me reporting on Schedule E for now! Then later amending returns?)

If not, is there ANY argument for reporting the 1098 interest on my Schedule B as nominee interest? In other words, Schedule B would have line 1: 1099-INT interest income from buyer, line 2: minus 1098 mortgage interest as nominee for bank? This is how you handle interest you (solely) receive from a bank that you have to split with a joint-account holder; it becomes the nominee’s responsibility to 1099 the joint-account holder.

If these are not possible, I meet the eligibility requirements for filing real-estate business on Schedule C, instead of Schedule E. While REALLY not desirable for future tax treatment, it would allow me to sandwich these interests in one place. Along with all other properties :(

Just for further clarification on wraparound mortgages: the fact of the original posters property being a residence (filer's primary home) or rental property doesn't change the Schedule B interest reporting, nor the Schedule A investment interest expense reporting. As Boston CPA said, it obviously CAN relate to the installment sale capital gains reporting, as rental-property has no capital gains exclusions.


Since I didn't notice many cross-postings between "Tax Strategies" and "Real Estate Investing", but this seems relevant to both, so I'm asking here, as well as:
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