Dear Tax Talk,
If I use my home equity line of credit to help my son purchase a home (he will pay me a mortgage), can I still get a tax deduction for the interest I pay on the home equity line? And do I need to report the interest he pays me from the mortgage?
If you itemize your deductions on Schedule A and you meet the IRS requirements, you may be able to deduct the interest you pay on a home equity line of credit, or HELOC. You will be required to report all of the mortgage interest your son pays you each year as interest income on Schedule B, Interest and Ordinary Dividends.
The IRS has rigid requirements for deducting interest on home loans.
What you can deduct:
- Mortgages taken out before Oct. 13, 1987, otherwise known as "grandfathered debt."
- Mortgages taken out after Oct. 13, 1987, to buy, build or improve your home, otherwise known as "home acquisition debt."
- Mortgages taken out after that date used for purposes other than to buy, build or improve your home. Note that the interest on these home equity loans or lines of credit is deductible as long as the loan amount doesn't exceed $100,000 ($50,000 if your filing status is "married filing separately").
The mortgage amounts for grandfathered debt and home acquisition debt cannot exceed $1 million ($500,000 if you're married filing separately).
Finally, when determining how much of the HELOC can be deducted, keep in mind that you cannot write off more than the fair market value of your home, minus the loan amounts for grandfathered or home acquisition debt.
For example, let's say you have an outstanding mortgage on your home from your purchase 15 years ago of $100,000, and your home is worth $250,000. You take out a HELOC in the amount of $100,000 to help your son. You can deduct the interest from the entire amount of debt -- $200,000 -- on your home.
The HELOC can be on your main home and also on a 2nd home. However, if it is on a 2nd home, you will need to factor that into your calculation. For further details, please take a look at IRS Publication 936, Home Mortgage Interest Deduction.
Be sure that there is a valid "mortgage" between you and your son on the property, as this will enable him to deduct the mortgage interest he pays to you on Schedule A. Otherwise, he will lose the deduction, as the IRS will classify the interest he pays you as personal debt interest, which is not deductible for him. Regardless, you still must report it as interest income.
Thanks for the great question and all the best to you and your son on his home purchase.
Ask the adviser
To ask a question on Tax Talk, go to the "Ask the Experts" page and select "Taxes" as the topic. Read more Tax Talk columns.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.