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

The good news is that you can generally deduct these expenses, but how you do it depends on how you're reporting the income from the seller financing. If you're treating this as an investment activity (which is most common for one-off seller financing), the fees paid to the third-party service would typically be considered investment expenses. The upfront fee would likely be capitalized and deducted over the life of the loan (similar to points on a mortgage), while the ongoing monthly servicing fees can be deducted as investment expenses in the year you pay them. On Schedule B where you'll report the interest income from your son, you can deduct the related expenses that are directly connected to that income. Just make sure you're keeping detailed records of all these fees. If you're doing this regularly enough to be considered a business activity, you'd report it differently on Schedule C, but for a one-time transaction with a family member, the investment approach is usually appropriate.

After spending hours trying to figure out a similar situation with my investment property, I discovered taxr.ai and it saved me so much stress! I was confused about how to handle seller financing costs just like you, and their system analyzed all my documents and gave me clear guidance. Their AI actually found some deductions related to my third-party servicing fees that I didn't even know I could claim. I uploaded my third-party service contract at https://taxr.ai and it highlighted exactly which portions of my fees were immediately deductible versus what needed to be amortized. It even generated the proper schedule for amortizing the upfront costs over the loan term. Super helpful when you're dealing with something complicated like seller financing!

I just wanted to follow up about my experience with taxr.ai for my parents' seller financing situation. After seeing the recommendation here, I decided to give it a try since our situation was pretty complex - my parents selling their lake house to my brother using seller financing with some unique conditions. I uploaded our financing agreement and the third-party servicing contract, and the system immediately identified which expenses could be deducted immediately versus amortized. It even flagged a potential issue with our interest rate being below market rate, which could have caused gift tax complications! We were able to adjust our agreement before finalizing everything. The detailed explanation of how to handle the servicing fees on Schedule B versus what needed to be capitalized saved me hours of research. I'm actually kind of amazed at how well it worked for such a specific tax situation. Definitely worth checking out if you're dealing with seller financing.

If you're struggling to get clear answers from the IRS about how to handle these seller financing costs (I certainly did), I'd strongly recommend Claimyr. I kept calling the IRS for clarification on some specific points about seller financing deductions and couldn't get through for weeks. After wasting hours on hold, I tried https://claimyr.com and was honestly shocked at how well it worked. They got me connected to an IRS representative in about 20 minutes when I'd previously been waiting on hold for hours. The rep gave me specific guidance on how to report the third-party servicing fees and how to properly amortize the upfront costs. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c It was such a relief to get official clarification rather than just guessing or relying on internet advice for something as specific as seller financing to a family member.

I need to eat my words about Claimyr. After seeing it mentioned here, I was extremely skeptical since I've tried everything to reach the IRS about some questions on rental property sales and seller financing. Decided to try it anyway out of desperation - I had a deadline coming up for finalizing a seller financing agreement with my tenant who's buying my duplex, and I needed clarification on how to treat the origination fees I was paying. It actually worked! Got connected to an IRS rep in about 30 minutes when I'd been trying unsuccessfully for weeks. The agent confirmed that I should treat the upfront fees as points (amortized over the loan term) and the monthly servicing fees as investment expenses deductible against the interest income I'll receive. For anyone dealing with seller financing questions that aren't clearly addressed in IRS publications, this is definitely worth trying. Saved me from making some potentially costly assumptions.

Have you considered setting this up as an actual business? If you're doing this transaction and might do others in the future, you could potentially set up as a lending business and deduct all these expenses on Schedule C instead. The benefit would be immediate deduction of expenses rather than amortizing some of them over the loan term. There are specific requirements for being considered a business rather than just an investor, but if you meet them, it might be more tax advantageous. You'd need to show that you're engaged in the activity with continuity and regularity with the primary purpose of income or profit.

Quick question for anyone who's handled seller financing before - which tax software best handles reporting these kinds of transactions? I used TurboTax last year but I'm not sure if it will properly guide me through the amortization of the upfront fees and the correct placement of the monthly servicing costs.