 Reporting
installment sale income
Tax Talk by George
Saenz • Bankrate.com
 Dear
Tax Talk,
We hold a mortgage on a rental property we sold,
and now the buyer is talking about getting a lower interest rate
from a bank and wants to pay the mortgage off early. We have a penalty
clause that if paid off before 15 years, they must pay a penalty
of 10 percent. Do we have to claim the penalty amount as capital
gains? -- Gene
 Dear
Gene,
If you sold the rental property and took
back a mortgage, chances are you're reporting the sale as an installment
sale.
In an installment sale, part
of each payment is interest and part is principal. The interest
is ordinary income and should be reported on Schedule B.
The principal payments are
capital gain and should be reported on Form 6252 and carried to
the appropriate schedules on your tax return.
A prepayment penalty on a
mortgage is considered additional interest income. Accordingly,
report the additional interest on Schedule B.
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