How to Claim Mortgage Interest With IRS When Money Is Borrowed From a Private Party

Homebuyers can use private loans to purchase their property.

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Sometimes, you have to get creative when looking for a lender to provide money to buy a home. If your credit is not ideal or you don't have the cash for a big down payment, you might have to work out a financing arrangement with the seller, or go to Mom and Dad for a loan. Regardless of where you get the money, you can still claim the home mortgage interest deduction on your annual federal taxes as long as you meet the requirements.


You can claim an itemized deduction for interest on a loan that is used to buy, build or improve your primary home or a second home. The loan must be secured by one of the homes -- the lender must have the legal right to take possession of the home if you default on the loan. You can deduct the interest on up to $1 million in qualified loans as of 2012, or up to $500,000 if you are married filing separately.

Calculating Interest

Most professional lenders will send you a Form 1098, mortgage interest statement, at the end of the year to let you know how much mortgage interest you can deduct. But if the loan is financed by the original homeowner, or you borrowed the money from a relative, you would have to calculate this amount yourself. An online amortization table can be used to calculate your total interest payments.

Amortization Tables

An amortization table shows you how much of your payments go toward interest and how much go toward reducing equity. In the early years of a mortgage, most of the payments usually go toward interest until the equity gets paid down. To find your deductions, add up the portion of all your payments for the year that went toward interest. To use an online loan calculator, you need to know the amount of the loan, the interest rate, the repayment period and the start date of the loan.

Claiming the Deduction

If you have a Form 1098, you can simply report the total amount of mortgage interest from the form on line 10 of your Schedule A. If you didn't get a 1098, you must enter the amount of mortgage interest on line 11. In addition, you must write the lender's name, taxpayer identification number and address in the space next to line 11. Generally, a person's taxpayer identification person is either the Social Security number or employer identification number. You can request a person's taxpayer identification number by sending them a Form W-9, which you can download from the Internal Revenue Service website.