Tax deduct seller financed mortgage interest after sale of property?

Question

I purchased a rental property several years ago from a relative and the seller financed the mortgage. Over the past several years I have claimed the interest deduction on my 1040 and the relative claimed the interest as income.

I sold the property in 2018 and paid capital gains tax on the gain. However, the relative did not want the mortgage to be paid off, instead she wants to continue receiving monthly payments. It's a good interest rate so I am happy to put the money towards other investments.

As the loan was originally for a property, and the relative claims it as interest income, can I still deduct the interest on my personal taxes?

Answer 1

Since the loan is no longer associated with a home, it isn't mortgage interest.

You should not claim any mortgage interest you paid after to sold the house. That would mean anything post sale in 2018, all of 2019.

Now you have to determine if it is investment interest. It would depend on the dates, amounts, and types of investments.

For investment interest you need to refer to IRS publication 550 InvestmentIncome and Expenses

There currently is a important note on the font page of the PDF as of February 17th 2017:

This form, instruction, or publication is being revised to reflect legislation enacted December 20, 2019. The updated revision will be posted here as soon as possible. We apologize for the delay and inconvenience. The most recently issued final revision begins on the next page, but, again, is currently being updated.

I have no idea if the changes referred to will impact what you can deduct in 2019, the PDF currently available only applies to 2018.