Can I claim this as a write-off?

I have a 2nd mortgage that I took back this year. I told the homeowners that if they cash me out within a year I would eat half of the balance.

Took 2nd back for 16.2K
Payoff is around 8K if I eat half

Can I claim the 8K that I ate a loss? 1099 the homeowner?


In my opinion, the answer is NO to both questions.

I am assuming that the buyer is neither insolvent nor bankrupt.

The reduction in debt for your seller financed purchase money mortgage is treated as a reduction in the purchase price the buyer paid for the property. There is no cancellation of debt income for the buyer, so no 1099.

You also don’t have a write-off, either. However, since your sale price is reduced by the amount of your debt reduction, you may be entitled to a refund if you paid capital gains taxes on the higher sale price.

See IRC §108(e)(5). Consult your CPA for specific details