@Curious_panda1 wrote:
so if I provide my parents a lien so that the loan is collateralized by the home then I can deduct the interest I paid toward the loand?
Does the fact that my parents are not U.S citizens and don't file US tax return matters in this case?
The loan must be secured by the home. Usually this means a lien that is recorded against the property in the county clerk's office, or wherever such records are kept in your location.
However, the IRS also follows a doctrine of substance-over-form. That is, a transaction is judged by its result, rather than the paperwork. A transaction may be improper if the result is improper, even if the steps to achieve that result are individually legal.
While you could, on paper, qualify to deduct a loan taken out to buy a home as a qualifying mortgage if you gave your parents a lien and recorded it with the county clerk, if you were audited, the IRS might ask if this was a real lien or only for show. Would your parents really foreclose and take your house if you couldn't make the payments?
Furthermore, if this is a loan, then your parents are expected to charge you interest, at the applicable federal minimum interest rate (or higher), and they must report this interest as US taxable income, and file a US non-resident tax return to report the interest and pay US income tax on it. (Interest is taxable US income if the payer is a US person, even if the lender is not a US person). Even if your parents don't charge interest, they are required to report as taxable income and pay tax on the interest they could have received if they charged the applicable federal rate.
https://www.irs.gov/individuals/international-taxpayers/nonresident-aliens-source-of-income
So, bottom line, if you want to deduct this interest as a qualifying mortgage interest,
a. You must give your parents a lien and record it with the proper authorities where you live (you will need a lawyer for this, probably).
b. Your parents must report the interest as US taxable income and pay US income tax on it (form 104NR).
c. You must be prepared to prove, if audited, that your parents really do intend to foreclose on the home, kick you out, and sell it to someone else, if you stop making payments.
