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<< In June, 2000, I sold my residence under a wrap around financing contract (All Inclusive Trust Deed). I received a down
payment and continue to receive mnothly paymnents, which I use to pay the existing mortgage. Title is to be transfered at the
end of the contract, October, 2001.

How do I treat the income and expenses in my 2000 Tax return? >>

You have a little bit of a unique situation here. I will assume for the purposes of this post that the property was your personal
residence and would qualify for the $250,000/$500,000 gain exclusion.

In a normal wraparound mortgage, you would recognize a portion of the payments received each year as gain (i.e. installment
sale). However, no gain would be recognized if your personal residence falls within the exclusion guidelines.

You would recognize the interest that the purchaser pays you each year as interest income on Schedule B. The interest you
pay on your existing (original) mortgage creates an interesting dilema. Normally, you would deduct this interest as mortgage
interest on Schedule A. However mortgage interest is only deductible when paid by the taxpayer who is the legal or equitable
owner of the property. A taxpayer becomes the beneficial or equitable owner of mortgaged property when he assumes the
benefits and burdens of ownership. I think in this situation that even though you are still liable for the mortgage on the property
and still hold the title, the person you sold the house to would be the owner for the purpose of the mortgage interest
deduction. Thus the interest that you are paying would be investment interst expense and reported on Schedule A subject to
the investment interest limitations. This of course could be subject to debate and would depend on such factors as who is
responsible for RE taxes, insurance, repairs, etc.

If any portion (or all) of the gain could not be excluded, then you would have to calcualte the gross profit % and multiply it by
the payments received each year to determine the gain that you would recognize for that year.


Thank you very much for the information!!

Actually, the situation is a bit more complicated. For the last two months of 1999, and until June of 2000, I had the property rented out (could not get a proper price).

The way I see it, I would take rental income vs. depreciation, and other expenses for Jasnuary to June. Then interest income vs. interest expense (net is zero) from June to the end of the year.

I am paying the Real Estate taxes, association dues, a first and second mortgage from the monthly proceeds. All of this nets to zero. (The consideration for the low interest rate was through the price in the property.) Would I show these as miscellaneous income offset by the corresponding expenses? Could I just ignore these, since there is no net income?

Can anyone direct me to any publications dealing with this subject?

Thanks and regards,

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