@Anonymous_ wrote:
@Opus 17 wrote:
....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.
To the best of my knowledge, this "requirement" is found nowhere in Section 163, the Regulations promulgated thereunder, or anywhere else in the Code.
The question is one of substance-over-form, combined with the principle that all deductions are matters of legislative grace and must be proved by the taxpayer. In other words, if the IRS audits the taxpayer over the interest deduction, the taxpayer is guilty unless they can prove themselves innocent.
My concern is that, if audited, the IRS could allege that the lien is a sham designed to create an interest deduction. How could the taxpayer rebut that? I agree the lien would create a defense, but I'm a pessimist in this situation, and perhaps you are an optimist. Most taxpayers are never audited, but the risk is there, I think.
The conclusion that this is a sham would be even stronger if the parents don't report US taxable income on a 1040NR. Of course, if the parents do report taxable interest income, they will probably pay more income tax than the value of the deduction to their child//borrower, so maybe the IRS won't care, as long as the parents pay the tax.
