When Can You Not Take a Mortgage Interest Deduction?

When the federal tax code was written in 1913, all interest was deductible, but at that time very few Americans outside of farmers had home mortgages. In 1986, when Congress overhauled the tax code, it eliminated the interest deduction for most consumer debt except mortgages. Today, homeowners may deduct interest on up to $1 million of acquisition mortgage debt and up to $100,000 of home equity loan debt. When it comes to claiming the mortgage interest deduction, only the person legally obligated to pay the mortgage can deduct interest payments.

You may be thinking, of course, this sounds logical. But with rising costs and stagnant wage growth, a growing number of people either have someone else making their mortgage payment for them, or have someone else assisting them with their mortgage payment. If someone else is paying your mortgage, not only can they not take the mortgage interest deduction because they’re not legally obligated under the note, but you can’t take it either. Don’t lose out on deducting the interest from your mortgage. Instead of having a friend or family member pay your lender, there are some alternatives available that can help you keep your deduction.

Private Loan Agreement

If you enter into a private loan agreement with the individual who is making your mortgage payments, the money from the loan would be yours to then turn around and pay to your mortgagor, and you could then deduct the interest on your taxes. The loan agreement would need to be a notarized contract that meets lending standards.

Gift

If it is financially possible for your friend or family member to gift you a lump sum to pay towards your mortgage, instead of making the mortgage payments, he or she can give you up to $14,000 annually without paying the gift tax.

Add a Co-signer

A co-signer to a mortgage is allowed to deduct the interest. Adding the person who is making your mortgage payment as a co-signer on the loan will allow he or she to take the mortgage interest deduction. This is a severe option, though. If the loan falls into default, your co-signer will be on the hook for the debt.

If you have questions regarding the mortgage interest deduction, or need any other assistance regarding your tax return, the professionals at Nielsen Law Group can help you today. Call (480) 888-7111 or submit a web request here.