Documentation Needed to Claim Mortgage Interest as a Tax Deduction for an Owner-Financed Home

The mortgage interest deduction is one of the largest tax deductions for most U.S. taxpayers. According to the National Association of Homebuilders, 80 percent of the mortgage interest paid by U.S. taxpayers since 2000 has been claimed as a deduction on taxes. The IRS allows you to deduct any interest on a loan secured by your first or second home as a mortgage interest deduction, whether that loan is financed by a bank or through an owner-financed mortgage.

Deducting Mortgage Interest

Report the total mortgage interest you paid to an individual on line 11 of Schedule A of your Form 1040. List the name, address and taxpayer identification number of the person to whom you made your mortgage payment. The law requires sellers to provide you with their taxpayer identification number, which may be their Social Security number or a taxpayer identification number assigned by the IRS.

Documentation From Seller

If you finance your mortgage through a bank or other financial institution, the financial institution must send you a statement at the end of the year that shows how much interest you paid to it. Your seller may or may not provide you with a statement showing the total interest you paid during the year. The law doesn’t require sellers to do so, though you are required to provide them with your tax identification or Social Security number so that they can report the interest they receive from you on their income taxes.

Record Keeping

If you have an owner-financed mortgage, it’s up to you to keep track of the interest you pay during the year. The easiest way to do this is to generate an amortization schedule. This schedule shows how much of each payment you make goes toward the loan principal and how much toward interest. In the early days of a loan, more of the payment is interest. Over time, a larger percentage of each payment will go to pay down the principal. With an amortization schedule, you can track your payments and easily compute how much interest you’ve paid in a year.

Missing Information

If you’re missing information from your seller, such as his taxpayer identification number, you should send the seller a Form W-9, Request for Taxpayer Identification Number and Certification. The law requires your seller to provide this information to you. If you don’t provide the number, the IRS may fine you $50. If you reach the end of the year and you haven’t been tracking your interest payments, you can still figure the amount of interest you paid, using an amortization schedule, as long as you know how many payments you’ve made on the loan.