How to enter mortgage interest received from personal loan? Should I send borrower form 1098?

[ibjoe]

Specifically, I loaned my relative to buy a house, they pay me principal and interest every month. I understand I don't need to send them form 1098, because this is a personal loan, not "in the course of (my) trade or business". I think I should send them 1098 anyway, because that may be easiest way for us both. Where to claim that interest income in TurboTax Deluxe? Thanks.

[Critter · Accepted solution]

No, you do not send a 1098. You can use an amortization schedule which you both should have or just communicate the amount between yourselves so that both of you report the same amount. 

If you received interest from someone either as mortgage interest or other interest, enter it like you had received a 1099-INT and put the amount in Box 1.  Enter it under….
Federal Taxes Tab
Wages & Income
Choose Explore on my own or I'll choose what to work on  (if it comes up)
Interest and Dividends
Interest on 1099INT - Click the Start or Update button

[ibjoe]

Thank you 🙂

[jpinter]

Answers I've seen in the community all seem to fall short. Pretending to have a 1099-INT would seem to open you to audit questions. Meantime delivering a 1098 to the loanee and to the IRS seems the right way to declare the interest collected. Where to record that interest income is still up in the air and looks like a hole in TurboTax.

[Critter]

jpinter has a point .... so let me add to my answer.

If you are not in the business of loaning money like a bank then you do not need to send the payer a 1098 per the IRS regs on that subject. Instead the payer will report the mortgage interest paid by entering the name, address & tax number of who they pay on the Sch A and the   holder of the mortgage will report the name , address & tax number of the payer on the Sch B so they cross reference each other. 

See the screen shots ...

[ibjoe]

Thank you very much Critter#2 for the detailed answer and screen shots! Very helpful. 🙂

[jpinter]

Yes - thanks to Critter#2. Using entries in Schedule B as "Seller-Financed" gave exactly the same result as adding bogus 1099-INT forms. Only question is how this squares with the IRS in a case where one is NOT financing the sale of his own home, just floating a mortgage loan. Any comments appreciated.

[Critter]

Same thing. It is a loan you are getting interest on reported on a Sch B.

[ibjoe]

Not it isn't. It is not a "Seller Financed Loan", it's a private loan.
Where do I claim interest received from a private mortgage loan *NOT by seller* backed by Deed of Trust?
For the borrower, it is quite straight forward, enter the amount paid on line 11 of Schedule A.
But for the lender it is extremely unclear.
IRS instructions, e.g. Publication 936, only covers *Seller Financed Loans*, not private loans.
In that case, it would go on schedule B - but that's NOT the case, this is NOT a Seller Financed loan, it's a private loan.
It would be easy if lender sent borrower a 1098, but they are not supposed to do that unless they are "in the business", which is NOT the case..
The only place left is 1040 line 21 "other income", but the description of items for those lines doesn't fit this situation.
I spent hours searching, with no answer. It seems this situation isn't that uncommon, there should be a clear guideline from IRS what to do, but I haven't found it.

[Critter]

If it is not a seller financed loan then enter it as plain income like from a bank ....  either Sch B entries will suffice since both will put it on the Sch B with the exact same result. Interest income is interest income and you do not need to send a 1098 to report it on your return.  Putting it on line 21 could produce an IRS letter for an explanation ... putting it on the Sch B will not.

[ibjoe]

Thank you! I entered it using TurboTax 1099-INT dialog. While the borrower didn't send me a 1099, that appears the easiest way to get it on Sch B using TurboTax application. Borrower entered it on Sch A line 11. Neither of us entered Tax ID #s for the other, just names. I couldn't find guidance from IRS on TID requirements for private loans.

[ibjoe]

Also noting, while it is a private loan, it can also be categorized as a mortgage loan, as it is backed by Deed of Trust. That makes a difference to the borrower, but I don't see specific IRS guidance about how lender should treat it, so the default appears to be simple interest received.

[Critter]

If the other person entered it as mortgage interest on the Sch A then you really should enter as a seller financed loan if for nothing else than to have the information line up ... however it will all come out in the wash.

[ibjoe]

Thanks again, Critter#2. That is the frustrating part, it is NOT a "seller financed loan", it is a private loan. However it is also a mortgage loan, as it's backed up by Promissory Note / Deed of Trust, so borrower needs to report it as mortgage interest paid, on Sch A line 11 (no 1098 received). Now, best thing seems to be I claim on Sch B as interest received, and state the borrower Name and TID (SS) #, IRS can match it up. I wish I could find an official IRS statement that clarified this situation.