How to expense payment to bank on behalf of seller before property purchase

Here's the situation - Client has earnest money put down on a property to purchase. Closing takes longer than expected, so client graciously makes the sellers loan payment @ bank. Property has now closed, this amt was not
addressed anywhere. So, since it was made on behalf of the seller, what should it be expensed to on purchaser's side? AND, should that amt be reported on 1099 as "income" to the seller (my thinking is that he will get the benefit of the interest that was paid, plus he rec'd more $ @ closing because of the principal that had been paid.
(background - I'm a fullcharge bookkeeper, but sometimes I run into situations I'm not exactly sure about. Tax preparer on this acct is an EA and I'm not sure he could answer my question. TIA!) N Owen
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Can the seller not simply repay the buyer? It seems like a short term loan arrangement, and if they repay there wouldn't be any tax consequences. I don't have any guidance to back up that position, but just thinking out loud...

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wrote:

No, not an option. This was just a gentlemen's agreement and no repayment is expected. I now have to deal with the fallout (and book/report correctly! :^)

N Owen
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If that's the case, sounds like a gift to me, and I don't believe you can deduct interest on property you don't yet own. Unless it's a material amount, I'd call it a gift and move on. Seller gets the benefit of the interest deduction and extra principle.

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On Thu, 05 Aug 2010 08:46:17 -0500, N Owen wrote:

I would also consider this a gift per the guidelines since your client is not getting anything in return. However, you need to show this in case this comes up in the future.
If you want an audit trail for this transaction, try this in Quicken or Quickbooks (or a similar program):
1. Set up a "gift" account in cash flows or the COA. 2. Make an entry for the check to the bank, but book it as a transfer to the gift account. 3. Within the gift account, transfer out the loan payment by showing the seller as the payee and book it to "gifts given" since your client cannot show that he received anything in return.
Of course, you could do it the easy way and directly book the check to the bank as gifts given and provide more detail in the comments section, but that may initially appear as a direct gift to the bank.
--
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