Deductions for interest payments are limited as they're only available for specific types of loans. If you co-sign a loan, your legal obligation to pay off the outstanding principal balance and interest should the primary borrower, or other co-signers, fail to pay isn't sufficient to take the interest deduction. Regardless of the type of loan, write-offs are only available if you actually pay the interest and satisfy all other requirements of the deduction.
Co-signing a mortgage loan doesn't entitle you to take the deduction for interest unless you're also a co-owner of the home. But even as a co-owner, you can only deduct the interest that you actually pay during the year. For example, if you co-sign a mortgage with a friend, and you each own 50 percent, but because of a financial hardship you experience this year, your friend pays 80 percent of the mortgage and interest payments, you can't deduct half of the interest reported on the Form 1098 the lender sends you. Provided all of the deduction's requirements are satisfied, your write-off is limited to 20 percent of the mortgage interest you paid during the year.
Student Loan Interest
You may be able to deduct the interest you pay on student loans you co-sign for, even if the funds were used to send your spouse or a dependent to school. If you start making payments on the loan, whether temporarily or until it's entirely paid off, you can take the deduction for it provided the student used the funds to pay for expenses such as tuition, room and board, books and enrollment fees at an institution that's eligible to receive federal student aid funds. Additionally, the student must be enrolled at least half-time in a program that leads to a degree or other credential when you co-sign the student loan before the interest can be deductible to anyone.
When you co-sign a loan that's used to purchase investments, such as stocks and bonds, the law allows you to deduct the interest portion of each loan payment you make. However, the maximum amount of interest you can deduct is equal to your net investment income – which is your annual investment earnings minus all of the investment-related expenses paid, other than interest. But like the mortgage interest deduction, the key to writing off interest as a co-signer is an ownership interest in the investments. For example, if you co-sign a loan for your brother, and he holds all of the investments, you're not eligible to deduct the interest -- even if you're the one paying it.
Nondeductible Personal Interest
Keep in mind that the interest charges on most other types of loans is treated as nondeductible personal interest regardless of whether you own part of the property purchased with the funds or not. For example, the interest on loans obtained to purchase cars is always nondeductible because vehicles are treated as personal property unless used in a business. Essentially, unless Congress enacts a tax law allowing you to deduct the interest on a certain type of loan -- as it has done with mortgages, student loans and loans used to purchase investments -- it's likely that the interest you're paying is nondeductible.
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