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Q: Taxes: Mortgages ( Answered 5 out of 5 stars,   3 Comments )
Subject: Taxes: Mortgages
Category: Business and Money > Accounting
Asked by: alxengel-ga
List Price: $16.00
Posted: 23 Apr 2004 10:18 PDT
Expires: 23 May 2004 10:18 PDT
Question ID: 334933
Can I borrow money from my father for a new house that I
will live in and deduct the interest for taxes? I would like to set up
a mortgage with current market interest rates. If yes, what kind of
documentation and filing do we need to produce?
Subject: Re: Taxes: Mortgages
Answered By: taxmama-ga on 26 Apr 2004 07:45 PDT
Rated:5 out of 5 stars
Hi Alxengel,

Yes, you may borrow money from dad. 

Here's what you need to do. 

1) Write up a proper mortgage note and grant deed

You'll find free forms here:

You might want to try the links by state to 
make sure you get it right for your state.

[google search = mortgage forms free ]

2) You may use any interest rate you like, 
as long as it is at least the minimum rates
set by IRS - you'll find the table here:

For instance, in the case of a mortage, which
is a long-term loan, compounded monthly, your
minimum rate, in May 2004, is 4.56%.

CCH updates this page each month, so use it
before you finalize your paperwork. 

[no search - it's linked from my own site's tools]

3) There is some disagreement about whether or not
you must record the deed for the loan to be regarded
as valid by IRS. But there are so many reasons that it
should be recorded. 

a) Do it, and you definitely won't have any dispute
with IRS.
b) If you end up with credit problems or lawsuits, 
Dad's note is protected because it's secured against
your home.
c) If you have marital problems, Dad still gets paid
back, and/or you need to give your about-to-be-ex
less money, because your equity in the house is lower
by the amount of the mortgage. 

4) As to tax time. No, Dad doesn't need to give you
a Form 1098. Although it's all right if he does. 
(For most people, not in business, it's a pain.)
All you have to do is, on Schedule A, where you deduct
the mortgage interest, enter Dad's name, address and 
Social Security number on the lines provided or on a
piece of paper at the back of the return. 

That's the scoop. 

Now, see if you can find a house you can afford in 
this really tight market. 

Good luck, 

Your TaxMama-ga
alxengel-ga rated this answer:5 out of 5 stars
Very good and clear answer.

Subject: Re: Taxes: Mortgages
From: cmiller-ga on 23 Apr 2004 11:03 PDT
Have your father gift to you tax free up to 11,000 per year.

The Economic Growth and Tax Relief Reconciliation Act of 2001 did not
abolish the gift tax as are the estate and generation-skipping
transfer taxes. The law retained the $10,000 per year per donee
exemption although the amount is indexed annually ($11,000 for 2004).
The lifetime exemption from gift tax is raised in 2002 to $1,000,000
which means that gifts above that amount are subject to tax under the
same rate schedules as the estate tax until 2010 (in 2011, the rate
reverts back to a top rate of 55%).

Gift Taxes basically are taxes that supplement the Estate Tax. Gift
Taxes are placed on gifts given away to any person while you are still
living. You may give up to $11,000 a year in cash or assets to an
unlimited number of people each year without incurring Gift Tax
liability -- so long as there are no strings attached. Married couples
can give, as a couple, a $22,000 gift per year to as many people as
they want. If you give more than the $11,000 annually, the excess is
applied toward your lifetime gift-tax exclusion. The exclusion is $1.5
million in 2004. If at any point the gifts you gave during your life
or left in your estate exceed that exclusion, you pay gift tax on the
excess amounts over $1,500,000. Of course, any gift transferred
between spouses (where both are US citizens) of any size is 100% Gift

In actuality, the payment of Gift Taxes is relatively rare, thanks to
the annual exclusion, and the unlimited marital and charitable
Subject: Re: Taxes: Mortgages
From: research_help-ga on 23 Apr 2004 11:37 PDT
I believe the first comment has missed the point.  From the question,
it seems like the father and son/daughter WANT to pay interest and
have a mortgage, not a gift.  Keep accurate records of the transaction
and payments.  Your father will have to file a 1098 form showing the
interest paid by you.  He will be receiving interest income which he
will likely have to pay taxes on. You can report the interest from the
1098 on schedule A of form 1040. You will need to create an
amortization table to figure out how much of each payment is interest
and how much principal as this changes for each month of the mortgage.
Subject: Re: Taxes: Mortgages
From: alxengel-ga on 23 Apr 2004 13:27 PDT
Forgot to add one fact - my father lives in Europe.

PS. First comment misses the point. Second comment sounds good but
want to make sure that there is no filing of the mortgage contract
necessary. The way I read it - there is only need for paperwork if the
IRS decides to audit me.

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