Can You Deduct Mortgage Interest on Private Financing?

The mortgage interest deduction can make a big difference on your income tax return, especially if you fall in a higher tax bracket and have a large mortgage. The Internal Revenue Service doesn't care whether you use a nationally known bank or private financing for your mortgage, as long as the financing meets IRS requirements.

Mortgage Requirements

In order to qualify, a seller-financed mortgage must be secured by your home and the home must be qualified. When the mortgage is secured by your home, it means that if you fail to repay it, the lender can foreclose on the home to satisfy your debt. A qualified home is either your main home or a second home and it must have kitchen, sleeping and bathroom facilities, so even some recreational vehicles or houseboats could qualify.

Second Home Criteria

Even if you have many second homes, the IRS limits you to having just one at a time for tax purposes. In addition, to qualify as a second home, your home must either not be rented out at all, in which case you don't have to use it yourself, or you must use it for the longer of 14 days or 10 percent of the time it was rented out. For example, if you rent your second home out for a month during the summer, you must use the home yourself for at least 14 days during the remainder of the year.

Tax Deduction Reporting

Your mortgage interest deduction may be reported slightly differently on your taxes, but the result is the same. If you receive a Form 1099-R from the lender, it's reported the same way: on line 10 of Schedule A. If you don't receive a Form 1099-R, report the mortgage interest on line 11. Next to line 11, report the lender's name, address and taxpayer identification number. This can be a Social Security number, individual taxpayer identification number or an employer identification number.

Information You Must Provide

You must give the lender your name, address and Social Security number for her to report on her income tax return when she reports the interest income. If you don't cooperate, the IRS may fine you $50.

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