Can I Deduct the Mortgage Interest on a Home I Own in Which a Family Member Lives?
Whether you're being generous or it's just a business deal, you can find yourself owning a home where a family member lives -- and paying the mortgage. You may be able to deduct the interest on the home loan as part of your personal mortgage interest deduction or you may have to report it as a rental expense.
Second Home Qualifications
For the purposes of the mortgage income tax deduction, you can deduct the interest on your main home and one second home. You must use the home that you usually live in the majority of the year as your main home. Your second home can be a home that you don't rent out even if you don't use it. If you do rent it out, you have to use for personal purposes for the longer of 14 days or 10 percent of the time you rent it out.
According to IRS Publication 527, personal use typically includes days that the home is used by a member of your family. However, if your family member uses the home as his main home and pays fair market value rent, the use is considered rental use, rather than personal use. In that case, the home wouldn't qualify for the mortgage interest deduction, but you would deduct the mortgage interest as a rental expense.
Mortgage Interest Deduction
If the home used by the family member qualifies for the mortgage interest deduction, you have to itemize your deductions to claim the tax break. In addition, you're limited to deducting the interest on only $1 million of interest on both your main home and your second home combined. The total interest paid goes on Schedule A and then, after being combined with your other itemized deductions, replaces your standard deduction on your Form 1040 tax return.
Rental Expense Deduction
If you do charge your family member fair market rent, you need to report both your rental income and rental expenses on your income taxes. When you file your taxes, you must attach Schedule E. Schedule E shows all of your rental income as well as your expenses, which include mortgage interest as well as depreciation, repairs and other costs of renting property. The net income or loss is then transferred to Form 1040 and included in your taxable income.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."