Q: I’m located in Alabama and I own a house. The house is rented to a tenant that intends on buying the home once she has improved her credit and can refinance the balance on the loan on the home of $50,000.
I sold the home to her for $70,000 and she gave me a $20,000 down payment. I have given my tenant a 1098 though I was still financing the house. Did I do the right thing?
A: I’m a bit confused by your question. You say you own the home and yet you also say that your “tenant” purchased the home. If you still hold the title to the home, would it be fair to say that you sold the home on an installment basis and when your buyer pays you in full, you would transfer the title of the home to the buyer?
Or, did you just sell the home but feel as if you still own it because your buyer has not paid off the loan on the home?
Here’s another possibility: Did you enter into a lease with a tenant giving the tenant the right to buy the home at some future date, at a certain price and the tenant paid you $20,000 either as a deposit towards the future purchase of the home or as an option fee to buy the home with the $20,000 applied towards the purchase price?
If you actually sold the home either by transferring the title to the buyer or entering into an installment sale for deed for the home, you would no longer be considered the actual owner of the home. In that case, the loan documents signed by the buyer or the installment purchase agreement signed by the buyer would indicate the payments your buyer is making on the home.
These payments may have an interest component and may have a principal repayment as well. In either case, you can report the interest your buyer pays you by completing an IRS form 1098. This form discloses the amount of interest that you have been paid the prior year by your borrower. You can obtain a copy of the form from the IRS by calling them at 800-829-3676. You will also need to order IRS form 1096. When you complete for 1098, you’ll keep a copy and send a copy to your borrower. But in order to send the form to the IRS, you will need to complete form 1096. You then send both forms to the IRS.
However, if you have not sold the home to this person and he is merely renting the home from you until he can finance the $50,000 to complete the purchase, the payments he or she is making to may simply be rent on the lease and you may not be required to complete the 1098 form.
The 1098 form is uses for mortgage interest payments and if your tenant is truly considered a tenant, those payments made to you will either be considered rental payments or down payments towards a future closing price on the home.
If you are in doubt about how you structured the deal, talk to the attorney that assisted you in the transaction. If you did not use an attorney, you might want to talk to one and make sure you structured the deal properly and talk to an accountant to determine whether the buyer/tenant is paying you rent on the home or interest on the loan you gave him to purchase the home.
For further tax questions, please consult with a tax expert.