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I have done so in the past; however, I think you are confusing two issues: (1) making a mortgage on property you just happened to have sold; versus (2) an installment sale of property. If you carry back the paper you are just writing a mortgage; it is not an installment sale; therefore you own an asset --- the mortgage and each month you receive payment which is mostly interest and some principal. You would report the interest only as earned interest on Schedule B of your 1040.

Further, I see no need for an intermediary. It's not real difficult to prepare and send a mortgage notice each month; collect late fees if necessary and send out a 1098 statment once a year.

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