Can I write off seller financing costs when selling property to family member?

This is an interesting situation! When you act as the lender in a seller-financed transaction, the IRS does take interest in those expenses related to generating the interest income. The upfront fees to set up the seller financing can typically be amortized over the life of the loan. Since these costs are directly related to generating interest income, they're considered investment expenses. These would generally be reported on Schedule A as miscellaneous itemized deductions subject to the 2% AGI floor. However, be aware that under current tax law, miscellaneous itemized deductions are suspended until 2026. The monthly servicing fees are more straightforward - these can be treated as expenses against the interest income you receive. You'll report the interest income you receive on Schedule B, and you can deduct these servicing fees directly against that income. Remember that the principal payments you receive aren't taxable - they represent a return of your investment. Only the interest portion is taxable income.

Just wanted to share my experience with seller financing and tax deductions. I spent hours trying to figure this out myself before finding https://taxr.ai which analyzes your situation and gives you straight answers about what's deductible. I was in a similar situation last year when I sold a rental property to my nephew with seller financing. I uploaded my loan servicing agreement and they identified exactly which fees were deductible immediately and which needed to be amortized. Saved me from making a costly mistake on my taxes since I was initially treating everything as immediately deductible! They also explained how to properly report the interest income and principal payments. Their system walks you through everything step by step so you don't miss anything. Might save you some headaches trying to figure out how to handle these specialized deductions.

Just wanted to follow up about my experience with taxr.ai after trying it for my seller financing situation. I was honestly impressed with how detailed the analysis was. I uploaded my loan servicing agreement and financing documents, and it broke down exactly which expenses were deductible and when. For my situation, it identified that my loan origination fees needed to be amortized over the 15-year term of the loan, but the monthly servicing costs could be deducted directly against the interest income I receive. It even flagged that I should keep documentation about those amortized expenses since they might become deductible again in 2026. Definitely exceeded my expectations for a tax service since it handled this specialized situation really well. Just thought I'd share since it actually worked for this exact scenario.

If you're dealing with the IRS about these seller financing deductions, good luck getting clear answers from them directly. I spent 3 weeks trying to reach someone at the IRS who could clarify how to handle my seller financing expenses. After being on hold for hours multiple times, I finally discovered https://claimyr.com which got me through to an actual IRS agent in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent I spoke with confirmed that the loan origination costs need to be amortized over the loan term, but clarified that the monthly servicing fees can be deducted directly on Schedule B against the interest income. She also provided guidance on how to document everything properly in case of an audit. Saved me so much frustration compared to the endless hold music and disconnections I was dealing with before.

I have to eat crow and admit I was wrong about Claimyr. After my skeptical comment, I decided to try it myself since I had some questions about reporting my seller financing arrangement on my taxes. The service actually did get me through to an IRS representative in about 15 minutes when I had previously spent hours on hold. The IRS agent I spoke with clarified that I needed to report the full interest received on Schedule B and then deduct the servicing fees on the same form. She also explained that the loan origination costs should be capitalized and amortized over the loan term. Having a direct conversation with an IRS agent made everything so much clearer than trying to interpret the tax publications myself. Definitely worth it for complicated tax situations like seller financing where the guidance isn't straightforward.

Something nobody has mentioned yet - you should check if any of these seller financing costs could be added to your basis in the installment sale. Depending on how the third-party service is structured, some of those upfront costs might actually be considered part of your selling expenses, which would reduce your taxable gain on the sale rather than being treated as investment expenses. If the fees were directly related to facilitating the sale itself (rather than just setting up the financing), you might be able to include them in your selling expenses, which would reduce your gain. This is different from the ongoing servicing fees, which are clearly related to the interest income.

Don't forget about state tax implications! My accountant reminded me that some states have different rules about deducting these seller financing expenses than the federal government does. In my state, I was able to deduct the loan origination fees against my state income even though they weren't deductible on my federal return due to the suspension of miscellaneous itemized deductions. Check your state's specific rules or talk to a local tax professional.

Great question about the tax software! Most mainstream tax programs like TurboTax, TaxAct, and H&R Block do handle basic state conformity differences automatically, but they often miss the nuanced situations like seller financing expenses. For example, my state (California) doesn't conform to the federal suspension of miscellaneous itemized deductions, so I was able to deduct my loan setup costs on my state return even though they weren't deductible federally. However, my tax software initially missed this and I had to manually override it. I'd recommend checking your state's department of revenue website or publication on itemized deductions. Look specifically for any mentions of "federal conformity" or "miscellaneous itemized deductions." If your state doesn't conform to the federal suspension (like California, New York, and several others), you may be able to deduct those amortized loan origination costs on your state return. Also keep in mind that some states treat interest income differently than the federal government, which could affect how you report the offsetting servicing fee deductions.