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Question for the Money Doctors

Question submitted on Aug 3, 2011.

Question

If I personnally lend money to my daughter to purchase a personal residence:
1. can she deduct the interest if we have in place a mortgage note to pay back the loan in 20 years with interest?
2. Is there a minimum interest rate that I should charge on the mortgage note? (I know some state''s have a Maximum rate, but no mention of minimum rates)

Answer

The short answer is that unless the indebtedness on the home exceeds the limits described below, the interest should be fully deductible as qualified residence, as long as it is secured by the home. 

Depending on the repayment terms, the interest rate that you must charged is published monthly by the Internal Revenue Service.  For August, the Applicable Federal Rate for periods in excess of 9 years (long-term rate) is 3.79%.

 A taxpayer may deduct qualified residence interest, which is any interest paid or accrued during the tax year on acquisition indebtedness or home equity indebtedness with respect to any property that, at the time the interest is accrued, is the taxpayer’s “qualified residence”, but only to the extent the interest is paid or accrued while the debt is secured by the residence. There are limits on the amount of indebtedness that qualifies for the deduction as qualified residence interest.  Basically, interest on acquisition indebtedness of up to $1,000,000 and home equity indebtedness of up to $100,000 may qualify as qualified residence interest.


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