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Posted by on April 20, 2008, 7:03 pm
If someone wants to lend money to a family member to buy a house
(parent to child, for example), and he charges a prevailing market
interest rate, say 5.5%, what paperwork would be necessary so that the
borrower could deduct the mortgage interest on his tax return? The
lender would have to pay tax on the interest received.
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Posted by Dave Dodson on April 20, 2008, 8:15 pm
On Apr 20, 6:03 pm, beliav...@aol.com wrote:
> If someone wants to lend money to a family member to buy a house
> (parent to child, for example), and he charges a prevailing market
> interest rate, say 5.5%, what paperwork would be necessary so that the
> borrower could deduct the mortgage interest on his tax return? The
> lender would have to pay tax on the interest received.
See IRS Publication No. 936, e.g., at
http://www.irs.gov/publications/p936/ar02.html#d0e187,
in particular the following sections:
Part I. Home Mortgage Interest
Secured Debt
Debt not secured by home
Qualified Home
How To Report
and other sections as may apply to your case.
Dave
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Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
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Posted by Mark Bole on April 20, 2008, 8:55 pm
Dave Dodson wrote:
> On Apr 20, 6:03 pm, beliav...@aol.com wrote:
>> If someone wants to lend money to a family member to buy a house
>> (parent to child, for example), and he charges a prevailing market
>> interest rate, say 5.5%, what paperwork would be necessary so that the
>> borrower could deduct the mortgage interest on his tax return? The
>> lender would have to pay tax on the interest received.
>
> See IRS Publication No. 936[...]
As the pub states, the debt has to be secured by the home, so consult a
lawyer to ensure the loan contract meets the requirements.
Once you meet the qualifications for deductibility, reporting it is a cinch:
"Deduct home mortgage interest that was not reported to you on Form 1098
on Schedule A (Form 1040), line 11. If you paid home mortgage interest
to the person from whom you bought your home, show that person's name,
address, and taxpayer identification number (TIN) on the dotted lines
next to line 11."
Even if the person isn't from whom you bought your home, showing the
name and so on can't hurt.
-Mark Bole
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Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
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Posted by joeu2004 on April 21, 2008, 3:05 am
On Apr 20, 4:03 pm, beliav...@aol.com wrote:
> If someone wants to lend money to a family member to buy a house
> (parent to child, for example), and he charges a prevailing market
> interest rate, say 5.5%, what paperwork would be necessary so that
> the borrower could deduct the mortgage interest on his tax return?
> The lender would have to pay tax on the interest received.
Not a financial planning question. You are likely to get a
dispositive answer by posting to misc.taxes.moderated.
By father-the-CPA actually sent 1098-Mortgage statements
for people for whom he loaned money secured by real property.
He also filed Form 1096 with the IRS along with the 1098-Mortgage
forms. You can download the forms and instructions from
http://www.irs.gov/formspubs/index.html .
(Caveat: You cannot send the online forms to the IRS. You
must use the red-ink paper forms, which you order from the IRS.)
I cannot say with impunity that he was right to send such forms,
or that it was necessary. As I read the instructions, he was
incorrect to do so. However, since his death, my mother's
CPAs have continued the practice on her behalf without raising
any questions.
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Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
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Posted by on April 22, 2008, 5:22 pm
beliavsky@aol.com writes:
> If someone wants to lend money to a family member to buy a house
> (parent to child, for example), and he charges a prevailing market
> interest rate, say 5.5%, what paperwork would be necessary so that the
> borrower could deduct the mortgage interest on his tax return? The
> lender would have to pay tax on the interest received.
As mentioned by another poster, getting this stuff right,
particularly documentation such that taxes can be handled
right (ie. mortgage interest deductibility, paying taxes
on interest income) and so that recourse is set up right
(ie. forclosure in the event of default), etc - is far
from trivial.
A lawyer could probably do much of it, but you might
save yourself a lot of money going with a service which
does a lot of this. Most mortgages are not held by
the banks which issue them, nor are they serviced by
the folks whose money is actually lent - someone lends
the money, someone else sets up and issues the loan,
and someone else may then service it (collect payments
and forward them to the lender, send out statements
and tax documentation).
I haven't had any reason to use them, but Circle Lending,
which has now become Virgin Money - will take care of
most of that for you. (I have no idea if there are any
other similar relatively low-cost providers, but I'd
be surprised if there weren't).
Anyway, take a look at <http://www.virginmoneyus.com>
If you do use them, please let us on the newsgroup
know how it goes.
--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting
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Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.
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