Posted by Dave T on January 29, 2000 at 11:44:10:
You report the interest you pay to the mortgage company as an interest expense, and you report the interest received from the buyer as income. This way, your interest expense will offset a portion of your interest income.
An agreement for deed is treated as an installment sale. The installment portion of the original sale and the principal received each year is reported on Form 6252. The interest you receive is reported on Schedule B.
If the property you sold was investment property, then you have to also be concerned with depreciation recapture rules. In the event that your adjusted basis is less than your mortgage balance, you also have to consider that the excess of your mortgage balance over your basis may also be considered an initial payment. Additionally, if your sale involved a wraparound mortgage, then other capital gains implications may come into play.
Consult your accountant/tax professional for instructions specific to your circumstances.