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I want to refinance our home to take almost 2% off our current rates. The problems is we have an 80/10 loan to avoid PMI but now, with added closing costs and some remaining negative amount in escrow that we have to roll over, we're are either over the 90% LTV most companies now want, they won't do the piggybacks anymore or an FHA option with includes its own mortgage insurance. My parents, who are retired, offered to loan the second loan to us as a private loan (with a decent interest rate). The question I have, is can I still claim the interest on the 2nd loan as tax deductible (since this is for a primary residence) and if so, what type of supporting paperwork do I have to fill out to meet whatever criteria the IRS has laid down.

thanks in advance for any advice,

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Publication 936
IRS said: You can deduct home mortgage interest if all the following conditions are met.
  • You file Form 1040 and itemize deductions on Schedule A (Form 1040).
  • You are legally liable for the loan.
  • There is a true debtor-creditor relationship between you and the lender.
  • The mortgage is a secured debt on a qualified home in which you have an ownership interest. “Secured debt” and “qualified home” are explained later.


You cannot deduct interest you pay for someone else if you are not legally liable to pay it. Both you and the lender must intend that the loan be repaid.

cheezedawg said: Publication 936
IRS said: You can deduct home mortgage interest if all the following conditions are met.
  • You file Form 1040 and itemize deductions on Schedule A (Form 1040).
  • You are legally liable for the loan.
  • There is a true debtor-creditor relationship between you and the lender.
  • The mortgage is a secured debt on a qualified home in which you have an ownership interest. “Secured debt” and “qualified home” are explained later.


You cannot deduct interest you pay for someone else if you are not legally liable to pay it. Both you and the lender must intend that the loan be repaid.


Not sure that answers OP's question

Yes, you can, but they will need to claim the interest as income (on which they are taxed), so it is probably a wash.

I have a similar arrangement with my dad, and neither of us report it just to keep things simple (his income tax lost would roughly equal my income tax saved).

If parents are retired and their tax rate is much lower than OP's, then there could be some tax arbitrage available here.

In CCH's software there is a separate section to enter mortgage interest paid to individuals. (Actually it's "mortgage interest paid to financial institutions" and "other mortgage interest"). You have to report the payer's SS on your return though so that they report the income.

arch8ngel said: Yes, you can, but they will need to claim the interest as income (on which they are taxed), so it is probably a wash.

Only if payee and payer are in the same income tax bracket.

by the sound of it ("secured debt"), i think the lender has to hold the deed/title, at least in part. if you did a quit claim deed (not sure if that is nationwide or local) you could make it work, but it doesnt sound like it's worth it unless you are in a much much higher tax bracket.

Yes, parents are retired, but my tax rate is pretty low too (1 income family, 2 kids, etc). Don't want the loan to have a lien on the title, causes first loan rates to go up. Not sure if that qualifies or not as "secured debt". Guess I need to look through some IRS pages.

crash813 said: Yes, parents are retired, but my tax rate is pretty low too (1 income family, 2 kids, etc). Don't want the loan to have a lien on the title, causes first loan rates to go up. Not sure if that qualifies or not as "secured debt". Guess I need to look through some IRS pages.
Publication 936 says: 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 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.

It's not secured without the lien.

arch8ngel said: Yes, you can, but they will need to claim the interest as income (on which they are taxed), so it is probably a wash.

I have a similar arrangement with my dad, and neither of us report it just to keep things simple (his income tax lost would roughly equal my income tax saved).

You do understand that your parents are required to report any interest income they receive whether or not you claim a deduction, right? Admittedly, not claiming a deduction makes it less likely your parents will be caught.

I agree that the parents would have to report the interest as income in any event. However, in order for you to be able to deduct the interest paid, they would have to have a security interest in the house. Which means recording a mortgage or some other lien against the property. Just having it in writing may not be enough.

Couldn't the parents give the same amount to the borrower as part of the annual gift allowance?

alexshih said: Couldn't the parents give the same amount to the borrower as part of the annual gift allowance?
Sure if they want. They could even take the amount to Vegas and bet it all on red if they want.
But they would still have to pay tax on the interest they received.

If you really wanted to do something like that, the parents should give an interest-free loan to the child. An interest-free loan would be treated as if the child paid interest to the parents at the Applicable Federal Rate (AFR) and the parents made a gift to the child of the same amount. But such a loan could qualify for the $10,000 or $100,000 exemption.
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