Unsecured Loans NOT Tax Deductible

A loan to assist on a mortgage that has not been recorded at Title and secured by the property has been determined by the IRS to not be tax deductible for the borrowers. It is considered a personal loan. The Interest earned by the Sellers IS taxable.

From IRS Publication 936 (2006)

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.

This is important to note as many parents or grandparents do not want to record the loan out of a perceived "trust" issue. But you are not doing your loved ones a favor since they will not be able to deduct the interest.

My Opinion:Secure the loan with the property. It protects you and gives the buyer a good write-off.

I am not a CPA or a licensed Tax expert. Consult a CPA or licensed tax expert for advice pertaining to your situation.

Larry Morris is a loan Officer with Equipoint Financial Network in Newberg, Oregon. He specializes in Oregon relocations and Sherwood, Oregon neighborhoods. He can be reached at larry.morris@equipoint.com. His website is www.PDX-Mortgage.com. This material is copy protected 2007 by Larry Morris, Mortgage News that Matters. All Rights Reserved