How to account for interest not received?

Question

Sold a house by mortgage.  Buyer was unable to pay often.  Eventually, I accepted the original balance for release, thereby waiving over six thousand dollars accrued interest.
For US taxes, should that amount be treated as bad debt, or reducing the profit (as expenses), or something else?
Is the buyer required to report it as income?  Or can he treat it as a gift?

Aganju · Answer

In a buyer-financed mortgage, you add the actual interest paid to you to your taxable oncome, year for year, as you get it.
If you don't get any more interest - for whatever reasons - you don't have to pay taxes for it, obviously.
The lost interest is just that - income you should have gotten (and taxed), but you didn't. There is no tax advantage to it for you, it's just tough luck.
For the buyer, it is a taxable gain, as you 'forgave' him a debt - same as if a credit card company forgives debt.

How to account for interest not received?

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