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DanielleCPA
DanielleCPA, Certified Public Accountant (CPA)
Category: Tax
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Experience:  Years of Experience in Business & Personal Taxes
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I borrowed $200K from my mother 2 years ago to buy and remodel

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I borrowed $200K from my mother 2 years ago to buy and remodel my first house. We didn't draw up any paperwork, but just agreed that I would start making payments when the house was finished and I could get it refinanced.

Now just recently, I paid my mom for all the back interest, and began making monthly payments based on a 30 year schedule we set up at 3% interest.

I'd like to get a tax deduction for the interest, but I'm concerned about the complication of not having a legal contract from the beginning. Will I be able to draw something up now, and still get a deduction for everything?
Submitted: 3 years ago.
Category: Tax
Expert:  DanielleCPA replied 3 years ago.

Hi and welcome to Just Answer! I'm happy to help with your tax questions. Feel free to interject at any time if you need clarification.

 

It won't be a problem for you to deduct the mortgage interest you pay to your mom, but please be advised that for you to be able to deduct the interest you pay to your mom, she will need to report it as income on her tax return. If she reports it, you will be able to get a deduction for the full amount of the interest you pay in any given year, including the back interest.

 

The fact that you did not have a formal document drawn up from the beginning will not affect the tax deductibility of your interest going forward. Draw up a document now, specifying the payment schedule, interest rate, etc. Specify in the document the original date of the loan and that you are paying the back interest in this year.

 

One caveat--please make sure that the interest rate you are ruling corresponds with the long-term applicable federal rates (AFR) in existence at the time the loan was made. A list of AFRs by month can be found here.

DanielleCPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 689
Experience: Years of Experience in Business & Personal Taxes
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