Personal Loan Tax

[aprbrew244]

Hi, I borrowed 20K from my mom. The current agreement between us is for me to pay 2400 a year for 10 years. The question I have is, is that interest paid (400 a year) deductible? It was used as a down payment on my house. Is the interest considered income for my mom?

Thanks

[mwcpa]

interest is taxable to mom...
the interest may or may not be deductible to you.... here's a little article at IRS.gov www.irs.gov/businesses/small/article/0,,id=224713,00.html

"June 22, 2010

The IRS reminds taxpayers that interest deductions on home mortgages are limited, including limitations for home acquisition and home equity indebtedness.

There is one limit for loans used to buy, build, or substantially improve a residence -- called home acquisition debt. There is another limit for loans secured by a qualified residence but used for other purposes -- called home equity debt. Internal Revenue Code Section 163(h) (3) provides guidance for the limitations on the home mortgage interest deduction.

The law allows taxpayers to deduct interest on two categories of indebtedness secured by their residences. Acquisition indebtedness is used to acquire, construct, or substantially improve a residence, and cannot exceed $1,000,000. Home equity indebtedness is any debt other than acquisition indebtedness and cannot exceed $100,000"

[taxref]

To emphasize an important point in MWCPA's answer, for interest to be deductible it must be secured by the home. Unless your mother has a perfected security interest in your home, the interest would not be deductible.

[commentator]

For other readers, the interest is also deductible if the borrower uses the proceeds of the loan in a trade or business. If the proceeds are used for personal items (like living expenses), the interest is not deductible.