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Personal Mortgage Loans

I loaned my son $200K to help him buy a house.  The IRS has a minimum interest rate that needs to be used to pay the loan back.  Is the interest he pays me taxable and do I need to file a 1098 form with the IRS? 

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8 Replies

Personal Mortgage Loans

The interest he pays you is taxable and is reported as if you received a 1099-INT. 

Personal Mortgage Loans

Does the mortgage interest deduction that my son is eligible to take, require me to send him Form 1098 as shown in Turbo Tax Help?  I recognize that the lender (me) is required to submit a 1099-INT to the IRS, but am I also required to submit Form 1098? 

Personal Mortgage Loans

Response didn't answer the question???

Personal Mortgage Loans

Assuming it was a personal loan and you don’t have a recorded lien on the home he can’t deduct the interest making that form unnecessary. 

Personal Mortgage Loans

And if the loan is secured against the house in a loan agreement?

Personal Mortgage Loans

Going back to the beginning.

 

You must charge interest at the applicable federal minimum rate (or higher).  You report interest received as taxable income on your tax return (but not the principal).  Even if you don't actually charge interest, you must report taxable interest income equal to the interest you could have charged at the AFR.  This is called imputed interest.

https://www.irs.gov/applicable-federal-rates

 

You do not issue a 1098 because you are not in the business of lending money.  You do not receive a 1099-INT because your child is not in the business of managing investments; they don't issue a 1099-INT just for making mortgage payments.  In Turbotax you just report the interest in the interest section, there may be a box to check for "I did not get a 1099-INT" but there may not be.  

 

If the loan is secured and counts as a mortgage in the eyes of the IRS, your child can deduct the interest they actually pay, even though they don't have a 1098.  They will enter the interest in the normal way, with the name and address of the lender and amount of interest paid.  I believe there is a list of special circumstances on the next page with a box to check for "I did not get a 1098 for this loan."

 

If the IRS were to audit you or your child, you will want to be able to show them an amortization table or how you calculated the interest, and proof that they paid it and you received it (canceled checks, bank drafts, etc.), so keep good records.

 

The loan is a deductible mortgage only if it is secured by the home.  This usually involves a loan agreement that meets certain legal qualifications and is recorded by your county clerk's office or wherever deeds and mortgages are normally recorded.  The IRS definition is quoted below.  If the loan is not secured by the home now, but you take steps to make it a secured loan in the future, then the interest becomes deductible from that date. 

 

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:

  • 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 can't 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.

Personal Mortgage Loans

If you have a recorded lien against the house give him form 1098. 

Personal Mortgage Loans


@Bsch4477 wrote:

If you have a recorded lien against the house give him form 1098. 


While the taxpayer probably could e-file a 1098 (although I'm not sure about that), they are not required to.

 

"Use Form 1098, Mortgage Interest Statement, to report mortgage interest (including points, defined later) of $600 or more you received during the year in the course of your trade or business from an individual, including a sole proprietor. Report only interest on a mortgage, defined later."

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