If you spent the money, then you are entitled to deduct it (as long as it is a deductible expense). Since it is a land contract, I will presume that you purchased this contract for investment purposes. Therefore, your expense is deductible, BUT it is subject to the passive income rules (which limit your deduction to any income from other passive activity). Give the information to your CPA and he/she will know what to do with it. If you do not use a CPA to prepare your taxes, I suggest you start doing so from here on out.
THESE COMMENTS ARE NOT LEGAL ADVICE. They are provided for informational purposes only. Actual legal advice can only be provided after consultation by an attorney licensed in your jurisdiction. Answering this question does not create an attorney-client relationship or otherwise require further consultation.
To deduct mortgage interest the debt must be secured by your home and you must pay the interest. The IRS takes the position that a land contract is a secured debt if properly structured. Therefore, if you are also paying the interest you should be able to deduct the interest you are paying the seller. The seller will have to claim, or should be claiming already, the interest they are receiving as income. You would report your interest on Schedule A as interest on seller financed mortgages - since you are not receiving a form 1098 for the interest you are paying. It would be a good idea to have a local tax professional review your land contract to determine if it constitutes a secured debt. You should also consider amending your tax returns for the last 3 years to include the interest you did not take in those years if you qualify.
Any individual seeking legal advice for their own situation should retain their own legal counsel as this response provides information that is general in nature and not specific to any person's unique situation. Circular 230 Disclaimer - Advice given in this response cannot be used to eliminate penalties with the IRS or any other governmental agency.