Posted by Michael(KCMO) on March 24, 2006 at 22:39:52:
As far as paperwork and keeping things simple for tax purposes at the end of the year, in situations like this I actually write up a purchase contract (along w/ title and all accompanying paperwork) and BUY the home from them for the outstanding balance of the note. That way, the note is technically paid off and ownership of the home is transferred back to you. No money actually exchanges hands, it’s all on paper. This will increase your tax basis in the home to the new “purchase” price, thereby reducing your taxable income at the end of the year.
That’s the way I understand it. I’m not an attorney or an accountant, so take it for what it’s worth.