How to Report Income From a Seller-Financed Mortgage

There are many reasons you might choose to offer owner financing. If you're trying to offload a home and not getting any takers, you might offer owner financing in order to incentivize a buyer with great terms. You might also offer owner financing if you're selling your home to a family member or close friend.

Seller financing can help both buyers who can't secure a traditional mortgage and sellers who are having difficulty selling a property. Seller financing is an arrangement in which the seller finances the home purchase for the buyer without the involvement of a middleman, like a mortgage company. It is important to remember that when a seller chooses a seller-financed mortgage, the seller will be responsible for paying taxes on the interest received.

To execute a seller-financed mortgage, the buyer and seller sign a contract that details the important terms of the agreement, like the repayment schedule, interest rate and penalties for defaulting on the loan. This contract is legally binding, and its terms bind both the buyer and the seller. When it comes time to make payments, the buyer sends the monthly payments directly to the seller instead of to a mortgage company. The incentive for a seller is that instead of the buyer paying interest to a bank through a mortgage payment, the seller is contractually entitled to the agreed-upon interest. This interest is income for the seller.

Seller-financed mortgages require the seller to report the interest on the payments that the buyer makes. The interest the buyer pays the seller is considered income. It is necessary to report this income annually on the seller's taxes, as is required with any other annual income. In order to determine how much of the buyer's total payments were for interest, the seller relies on an amortization schedule that divides each payment into principal and interest.

The income from the seller-financed mortgage is reported during tax season on the seller's Schedule B, the form for interest and ordinary dividends. In addition to the total amount, the seller will also need to enter the name, address and Social Security number of the buyer on Schedule B. Schedule B is filed with the rest of the seller's taxes, and the seller will be taxed on the income received through interest.

Any other interest payments the seller received during the year should also be entered on Schedule B along with the grand total of all the income the seller received through interest and ordinary dividends.