If you hold a private note, the interest your payer sends is generally taxable income to you, whether or not anyone sends you a form. Most individual holders report it on Schedule B of Form 1040, and many never file a Form 1098 or receive a Form 1099-INT. This page is general information, not tax advice, so check your own filing with a CPA or tax adviser.
Every January the same questions arrive from people who sold a house or land with seller financing. Do I have to send my buyer a form? Will the IRS know about this income? Why did my buyer ask for my Social Security number? The answers depend on a few named rules, and this page sits with the other note basics so you can see which rule does what.
Interest and principal are reported in different places
Each payment you receive is part interest and part principal. Interest is what the payer pays you for the use of the money. Principal is the part that reduces the balance. The split for every payment is set out on your amortization schedule, which is the starting point for your tax paperwork.
The two parts are treated differently. Interest is generally ordinary income in the year you receive it. Principal is your sale price coming back to you, and if you are reporting the property sale under the installment method, the gain in each year’s principal goes on Form 6252, which is a separate subject covered in installment sale tax when you sell a note. This page is about the interest.
An illustrative year
Say you sold a property and carried a $100,000 note at 6% over 30 years. The payment is about $600 a month, so in the first year you receive about $7,195. Of that, roughly $5,967 is interest and $1,228 is principal. The $5,967 is the figure that belongs on your return as interest income. The figures are illustrative, and your own schedule will differ with the rate, the term and the date payments started.
Form 1098: usually not yours to file
Form 1098, the Mortgage Interest Statement, is the form a lender sends a borrower showing the mortgage interest paid during the year. The duty to file it falls on people who receive mortgage interest in the course of a trade or business, such as banks and other lenders. An individual who sold their own home or a piece of land and carried a note is generally not in that position, so a one-off seller usually does not file a 1098.
That can change if lending is part of your business, if you hold notes through a company, or if you hold several notes and lend as a regular activity. Where the line falls for you is a question for your CPA, and it is worth asking if you hold more than one note. Check the current IRS instructions for Form 1098 for the filing conditions and any minimum amount, since we do not repeat figures here that the IRS can change.
If a loan servicer collects your payments, it may prepare year-end statements for you and your payer. Ask the servicer which forms it issues and in whose name, because the answer differs from one company to the next. What a note servicing company does gives the wider picture.
Form 1099-INT: you may never see one
Form 1099-INT reports interest paid to you by a bank, a brokerage or another business that pays interest. Your payer is an individual paying a mortgage, so in most cases no 1099-INT is issued for the interest on your note.
The lack of a form does not make the interest tax-free. It is still income, and it is still yours to report. Holders sometimes skip it because nothing arrived in the mail, and that is the error this page exists to prevent. Keep your own record of every payment received, with dates and amounts, so the interest figure can be worked out at year end.
Schedule B: where the interest goes
Schedule B of Form 1040 is the schedule for interest and ordinary dividends. When you receive interest on a seller-financed mortgage and your buyer uses the property as a personal residence, the Schedule B instructions ask you to list that interest first and to show the buyer’s name, address and Social Security number. That identifying detail is how the IRS matches your income to the deduction your buyer may claim.
This situation is listed in the instructions as one that calls for Schedule B, so do not assume you can skip the schedule because your total interest is small. If the property is not your buyer’s home, for example vacant land or a rental, the reporting may look different. Your preparer will know which lines apply.
Why your payer asks for your Social Security number
A buyer who pays mortgage interest to an individual and wants to deduct it generally claims it on Schedule A as home mortgage interest not reported on Form 1098. To do that they have to give your name, address and taxpayer identification number, usually your Social Security number. You, in turn, are generally expected to provide it when asked, and the IRS can impose penalties when either side fails to give or include the number.
The usual way to share it is Form W-9, the IRS request for a taxpayer identification number. It is a safer route than writing the number in an email. Ask for your buyer’s details the same way, since you need them for your Schedule B.
Situations that change the paperwork
- Your note charges little or no interest. Tax rules can treat part of each payment as interest even when the note says otherwise. That is imputed interest, and the rules behind it are set out in AFR and imputed interest on a seller-financed note.
- You hold the note with someone else. Co-owners, spouses filing separately and heirs sharing a note each report their own share of the interest.
- The note sits in an LLC, a trust or an IRA. The entity changes who reports the income and on which return.
- Your payer pays late fees or other charges. These are not principal, and how they are reported is a point to raise with your adviser.
- Your state taxes interest. State returns carry their own reporting, and states differ.
The year you sell or partly sell the note
If you sell the note during the year, the interest is split. Interest you received up to closing is yours to report. Interest paid after closing belongs to the buyer of the note. Your payer then has two recipients for the same year and may need details for both, so keep the closing statement with your tax papers and tell your payer who to list from which date.
A partial purchase, where you sell a set number of upcoming payments and the note returns to you afterwards, raises its own questions about who reports what while the buyer is collecting. The gain on the sale itself is a separate matter again, which taxes when you sell a note covers.
A January checklist for private holders
- Total the payments received during the year, with dates.
- Split them into interest and principal from the amortization schedule, and note any late fees separately.
- Confirm your buyer’s name, address and taxpayer number, and give yours on a W-9 if asked.
- Give your payer the interest total for the year so their figure matches yours.
- Take the interest total, the principal total and your Form 6252 history to your preparer.
Doing that each January keeps your records in the shape a buyer would want if you later decide to sell. A clean payment ledger with an interest and principal split is also the first thing a buyer asks for, so if you are weighing a sale, send us the note details along with that ledger and you will see what the remaining payments are worth today.
Related questions
Do I have to send my buyer a Form 1098?
Usually not, if you are an individual who sold your own property and carried a note. Form 1098 is generally filed by those who receive mortgage interest in the course of a trade or business. If you hold several notes or lend regularly, ask your CPA whether you cross that line.
I never got a 1099-INT. Is the interest still taxable?
Generally yes. Interest on a private note is income whether or not a form is issued. Keep your own record of payments and report the interest on your return, usually on Schedule B.
Why does my payer want my Social Security number?
A payer who deducts mortgage interest paid to an individual generally has to list that person's name, address and taxpayer number on their return. Form W-9 is the usual, safer way to provide it.
What happens to interest reporting in the year I sell the note?
Interest received up to closing is generally yours to report, and interest paid after closing belongs to the buyer of the note. Keep the closing statement with your tax papers and tell your payer about the change.