Land Contract Mortgage Interest Deduction Question - Posted by John Katitus

Posted by John Katitus on January 13, 2001 at 02:14:03:

There are no two persons’ ideas I would have appreciated more than Jim Piper and John Hyre. It’s great to see you are both finding time to read the board and comment.

I guess the breaking point is how much itemizing deductions and adding the interest and property taxes deductions exceeds the standard deduction. We know this is depends on the specific buyers tax position.

I don’t have a feel for that, since, I believe in theory, anyway, that the standard deduction is geared to be equal to that which a married couple with 1-2 children itemizing would be. The best way to know for a specific family would be to have a Turbotax return and do it both ways. If the family were in the 28% marginal tax bracket, and assuming a 5% State tax, they would save 33% of whatever the overage would be. On a $900 payment, mostly interest, that’s $300 per month.

Your question about splitting the savings. I have read Jim’s posts regarding Bill Gatten’s PacTrust’s. Those address the same situation: a buyer that pays for and deserves a tax deduction. Bill cites this as one of the advantages to his proposal. Similarly, if you can show the buyer that he can save $250+ dollars per month, depending on his specific tax situation, he shouldn’t have too much problem paying $100 more monthly.

Thank you for your comments.

Land Contract Mortgage Interest Deduction Question - Posted by John Katitus

Posted by John Katitus on January 12, 2001 at 02:38:21:

The buyer in a Lease/Option is missing a substantial savings (which could be split with the seller) by not being able to take a mortgage interest deduction, even though, effectively, he is paying that interest.

What if you call it a Land Contract and specify an interest rate and term for the purchase price? The buyer literally pays home mortgage interest and should be able to take the deduction. As Seller, you would have to declare that interest as mortgage interest income and interest on the underlying mortgage as an expense. Thanks for your comments.

LC & Interest Deduction - Posted by JHyre in Ohio

Posted by JHyre in Ohio on January 12, 2001 at 06:38:33:

Jim’s right as usual. To clarify slightly, the buyer’s standard deduction is generally large enough to be greater than the deduction created by the mortgage interest. The latter would be an itemized deduction, taken in lieu of the standard deduction. If the buyer has other itemized deductions, that combined with the mortgage interest, are greater than the standardized deduction, then itemizing becomes worthwhile. In addition to land contract, L/O can provide same tax benefit to buyer if structured as a financing- in which case the lessor is treated as a seller for tax purposes, i.e.- just like land contract. In Ohio LC is probably better than L/O…until buyer has 20% equity in LC, foreclosure is expedited, after 20+%, foreclose as if mortgage. L/O’s tend to be treated as mortgages, particularly in Northern urban area’s where Democrat judges troll for votes.

By splitting savings, I assume you mean an interest/price adjustment.

John Hyre

Re: Land Contract Mortgage Interest Deduction - Posted by JPiper

Posted by JPiper on January 12, 2001 at 06:00:06:

What’s the question? Your statements are generally correct, except for your statement that the buyer is missing a substantial savings which could be split with the seller.

Whether this is a substantial savings stemming from the interest write-off is debateable. That is actually going to depend on how much interest (and taxes) that we’re talking about. The standard deduction is $6K-$8K right now (sorry I don’t know the exact number). What this means is that the first $6K-$8K of your interest deduction does not help…you would have gotten the $6K-$8K anyway. Unless of course you have substantial OTHER deductions, which when combined with the interest deduction make a big difference in your tax return.

For properties under $100K, depending on the interest rate, the interest rate deduction has lost alot of it’s impact. But again, it depends on the borrowers OTHER deductions as well. The only way to truly know is to know the specific details to include the borrowers tax situation.

Your comment about “splitting” the savings with the seller I didn’t understand at all. If you sell the property by land contract, how does the seller then “split” the tax writeoff with the buyer???