Contract For Deed Buyers

• After the contract for deed deal has been consummated, the buyer begins making regular monthly payments to the seller that include interest. The IRS permits contract for deed buyers to deduct from their income the portion of payments that's attributed to mortgage interest, just as with a "regular" mortgage. In addition, assuming that the buyer is making property tax payments, those are deductible as well. Should the buyer make renovations that make the home more energy-efficient, he will earn a tax credit.
  
  

Contract For Deed Sellers

• Once the contract period begins, the seller is required to report the deal as an "installment sale." One of the great advantages for sellers in a contract for deed is the tax law that allows the seller to spread out the payments she receives on the house over the course of the term. Although she is required to report the interest income she earns on the buyer's monthly payment, she may negotiate how the loan amortizes to reduce her tax liability.
  
  

The First-Time Homebuyer Credit

• A contract for deed buyer can take advantage of the federal government's first-time homebuyer credit. Contract for deed deals that were consummated before July 1, 2010, are eligible for this credit, which is calculated at 10 percent of the cost of the home (the credit maxes out at $8,000). Although vacation home purchasers or those who want to own a rental property aren't eligible, those who haven't owned a home in the past three years are considered first-timers, according to the IRS website.
  
  

After Fulfillment

• Usually, contract for deed deals provide for a brief term of financing with a balloon payment due to the seller at the end of the term, often five years but sometimes as long as 10. At term end, if the buyer cannot pay the balance due in full, she must secure a refinance using the equity she's accumulated in the home. When the seller is paid in full, he must report the proceeds of the sale on his income tax returns. If the buyer has a new mortgage, she may continue reporting the interest portion of her payment, along with the property taxes; if she doesn't need a mortgage, she can continue to deduct only the taxes.