Dock David Treece
Thanks for the question. For specific tax questions, we would recommend that you consult with a licensed accountant. However, based on our understanding of tax law, it sounds like the seller in the situation you’ve described would not be able to deduct the interest portion of mortgage payments made to his or her bank.
Under most circumstances, home interest expenses would be deductible on Form 1040 Schedule A (assuming you itemize). However, in order for mortgage interest to be tax deductible, you must meet certain criteria set by the IRS (you can read more here: https://www.irs.gov/pub/irs-pdf/p936.pdf). One of these criteria is that you must have an ownership stake in the property on which the mortgage is being paid. If you’ve sold the home to someone else with seller financing, you would no longer have an ownership stake in the home. If you claimed a deduction for interest expense on the mortgage and are later audited, you’d likely owe taxes and penalties.
Based on the situation you’ve described, seller financing also seems difficult to structure since the property isn’t owned outright. More likely than not, the conditions of the seller’s mortgage with the bank would require that they immediately pay off the mortgage if they ever sold the home. For seller financing to work, the buyer would need to provide at least enough cash up front for the seller to pay off their mortgage, making the question of mortgage interest deductibility by the seller a moot point.
I hope this helps. If you have additional questions about a specific situation, we would highly recommend that you consult with a licensed accountant.