If you had a hard time finding a buyer for your home, you might have chosen to finance the home yourself. Known as seller financing or owner financing, this arrangement is commonly used when a buyer doesn't qualify for a traditional mortgage, or you sell a home to a relative on favorable terms. Since you are playing the role of the mortgage lender, you must report any interest you receive as taxable income.
Calculate the total amount of interest you received during the year. If you don't know exactly how much each of the payments went toward interest, consult an amortization table for the mortgage. The table breaks down each payment by interest and principal. If you don't already have an amortization table, you can create one using one of several free online calculators.
Report the interest on Schedule B of your tax return. Enter the amount of interest on the first line of Part I, along with the name, address and Social Security number of the person buying the home. If you don't already have the buyer's Social Security number, you can request it by sending him a W-9 request form. Failure to report the buyer's Social Security number can result in a $50 fine.
Enter any other interest payments you received during the year, and enter the total on line 4 of Schedule B.
Transfer this amount to line 8a of either Form 1040 or Form 1040A.
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