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One way in which people can borrow the money to purchase a house by creating a wraparound mortgage. Being able to deduct the interest paid on this mortgage is an attractive feature of home ownership. To be deductible, the home mortgage interest from a wraparound mortgage must be paid on a debt that is secured by the home -- and the home itself must qualify.
A wraparound mortgage can be used as a means to purchase a property or to borrow money. It is a debt secured by a property that leaves other mortgages in place. Typically a homeowner makes payments to a lender (usually the former owner) and the lender in turn makes payments on the original senior mortgages. A wraparound mortgage usually is recorded at the courthouse under the new owner's name and the property's legal description.
Home Mortgage Interest
Home mortgage interest is interest paid on a loan secured by your main or second home. The loan can be used to buy your home, a second mortgage, a line of credit, or home equity loan. Home mortgage interest is deductible when both of these conditions are met. You file Form 1040 and itemize deductions on Schedule A. The mortgage is a secured debt on a qualified home in which you have an ownership interest.
To be deductible, the interest from your wraparound mortgage must be secured by your qualified home. This is accomplished when you sign a document that puts up your home as collateral for a debt and if you do not pay then the lender can take your home through a foreclosure process and sell it to recover the loan balance. A wraparound mortgage is not a secured debt unless it is recorded at the courthouse.
To deduct interest involving a wraparound mortgage, the mortgage must be on a qualified home -- defined as your primary residence or second home. A property used for investment, rented to another or land without a house does not qualify. Interest from a wraparound mortgage on these properties is not deductible; it would be considered a business expense and would appear as an expense against profit or return on investment on another area of your tax return.
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