Don’t lose your ability to deduct mortgage interest from your taxes by not properly handling the mortgage loan paperwork when taking money from a relative to buy a home. Especially if you might become their heir.
Home mortgage interest can only be deducted if the loan you accept is a secured debt and you sign paperwork like a mortgage or deed of trust that stipulates the home will secure the debt. Then this paperwork needs to be recorded or filed according to your state or local laws so that the home, in case of default on the loan, will be able to satisfy your debt.
You may have a situation where your parent, grandparent or another relative can loan you the money to purchase a home because they have an available balance. They may offer you the money as a loan at the current 15 or 30 year conventional rate and not charge you any of the regular fees.
This might seem like a win-win situation, but it needs to be done correctly. These three criteria must be met in order for the interest deduction to be legitimate: (1) sign an instrument of debt which specifies terms and/or repayment, (2) secure and record the paperwork properly, and (3) the home must be of sufficient value to be used a collateral for the loan. If these criteria are not met, you will not be able to take a mortgage interest deduction.
In order to be confident that the buyer and lender-relative are complying with IRS regulations, you may want to consult with a real estate attorney before you sign the settlement papers. The IRS also provides Publication 936 – Home Mortgage Interest if you want to seek out more information on what qualifies.
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