Mortgage Interest on loan to family member

[orbillmb]

I loaned money to a family member to finance the purchase of a second home. It's not part of my business. I assume I report the interest income on Schedule B, even though there is no 1099-INT.

How does the family member report the interest for a mortgage deduction since there is no 1098?

Thanks in advance.

[Vanessa A]

Yes, you will report the interest income on Schedule B even though there is no 1099-INT.

Although you do not need to issue a 1098, you will need to give your family member a mortgage statement that shows the amount of interest they paid to you.  If your family member is taking the Standard Deduction, mortgage interest will not affect their return.   

If they are itemizing their return, then they will use the mortgage statement you give them to report the mortgage interest paid the same way they would if they had a 1098. 

[Bsch4477]

If the loan is not a secured debt on your home, it is considered a personal loan, and the interest you pay usually isn't deductible. 

[rjs]

In order for the borrower to deduct the interest on the loan, the loan has to be secured by the home and the mortgage has to be recorded by the appropriate state or local government agency. If that was not done, the loan is not a true mortgage. In that case the interest is not deductible so the borrower does not report the interest or anything else about the loan on his or her tax return.

If the loan is properly secured and recorded, since there is no Form 1098, the borrower enters the deductible amount of interest on Schedule A line 8b in their tax return. Line 8b is specifically for "Home mortgage interest not reported to you on Form 1098." The borrower should refer to "Part II. Limits on Home Mortgage Interest Deduction" beginning on page 9 of IRS Publication 936 to see if the amount they can deduct is limited. They should also look at the definition of Secured Debt in Publication 936.

You have to report the full amount of interest income on Schedule B even if the borrower cannot deduct it or cannot deduct the full amount. It's interest income to you, whether or not it's deductible mortgage interest for the borrower.

[longhorn80]

The catch:  if you are not a "registered mortgage lender" then any loan you make to a family member on a house purchase, even if is amortized the same as any other home loan, is not considered a mortgage by the govt. and the interest paid is not considered mortgage interest and is not deductible for the home purchaser.  The IRS considers it a simple loan, and the interest paid is taxable to the lender who receives it but it is not mortgage interest.  Seem unfair?  I think so but that is the law according to my tax attorney.  You can thank the Dodd - Frank act for this little nuance.  Before that it was considered deductible just like any other home mortgage.  And another tidbit, if you loan a family member money , and it is not a gift, you must charge a minimum interest rate specified by the IRS on a monthly basis (called the "AFR" rate) and it varies based on the term of the loan.  Fun stuff.