I am trying to figure my cost basis on an inherited wrap mortgage.?

Question

When I inherited in 2000 the principal balance due was $422,735, payments were made and interest income was reported. The buyer paid me off in 2006 at $359,284, and I paid off the morgage company at $173,912. What do I report as capital gains income, what is my cost basis?

Answer 1

As you received payments, your basis in the property decreased as your capital investment was returned to you.

When you received final payment, the amount of the final payment consists of principal and interest. Report the interest as usual. Report the sale on Schedule D using the principal part of the final payment as your adjusted basis and also as the sales price. There will be zero capital gain.

Answer 2

The only tax consequence of that mortgage was the interest you received. There is no capital gain.

There would only have been a capital gain if you had re-sold the mortgate for MORE than the outstanding balance. Since it was a debt owed to you and was paid as agreed, the only taxable income to you was the interest you received.