The mortgage doesn't have to be recorded as long as it's with family.
I know you want to believe that, but there is no exception in Sec. 163 of the statute for family debt. While someone at the IRS may have told you that, they aren't even familiar with their own publications. The IRS' Publication 936 (on Home Mortgage Interest) describes the requirement for secured debt as follows (note there is no exception for family debt):
"Secured Debt
You can deduct your home mortgage interest only if your mortgage is a secured debt. A secured debt is one in which you sign
an instrument (such as a mortgage, deed of trust, or land contract) that (underlining supplied):
-
Makes your ownership in a qualified home security for payment of the debt,
-
Provides, in case of default, that your home could satisfy the debt, and
-
Is recorded or is otherwise perfected under any state or local law that applies.
In other words, your mortgage is a secured debt
if you put your home up as collateral to protect the interests of the
lender.
If you cannot pay the debt, your home can then
serve as payment to the lender to satisfy (pay) the debt. In this
publication,
mortgage will refer to secured debt.
Debt not secured by home.
A debt is not secured by your home if it
is secured solely because of a lien on your general assets or if it is a
security interest that attaches to the property
without your consent (such as a mechanic's lien or judgment lien).
A debt is not secured by your home if it once was, but is no longer secured by your home."
Publication 936 is here: https://www.irs.gov/publications/p936/ar02.html#en_US_2016_publink1000229894
