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Sold a house by mortgage. Buyer was unable to pay often. Eventually, I accepted the original balance for release, thereby waiving over six thousand dollars accrued interest.

For US taxes, should that amount be treated as bad debt, or reducing the profit (as expenses), or something else?

Is the buyer required to report it as income? Or can he treat it as a gift?

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In a buyer-financed mortgage, you add the actual interest paid to you to your taxable oncome, year for year, as you get it.
If you don't get any more interest - for whatever reasons - you don't have to pay taxes for it, obviously.

The lost interest is just that - income you should have gotten (and taxed), but you didn't. There is no tax advantage to it for you, it's just tough luck.

For the buyer, it is a taxable gain, as you 'forgave' him a debt - same as if a credit card company forgives debt.

  • (In US) cancellation of debt is taxable income unless it is on a principal residence, business property, a farm and by a 'normal' lender (not the seller as here), or the debtor is bankrupt or insolvent. In this Q the first is pretty likely, the second conceivable, and the fourth and fifth reasonably possible (although the seller/lender should have been notified of the fourth). – dave_thompson_085 Nov 15 '20 at 4:56
  • If Dave is correct, then it’s basically a gift—which was sort of my intent. I accepted the amount as payoff from the outfit buying it from him, just to get both of us free of the mess. – WGroleau Nov 15 '20 at 7:18

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