Intrafamily Home Mortgage Not Recorded Not Deductible

Intrafamily Home Mortgage Not Recorded Not Deductible

Loaning money to your kids can be a great planning maneuver. It is critical that you follow all the formalities to avoid nasty surprises. In the recent Tax Court decision in the case of Christopher DeFrancis and Jennifer Gross it was the borrowers that got the nasty surprise. They borrowed $427,333 from Jennifer’s mother, Joan Gross, on January 1, 2003. They signed a note and a mortgage. The mortgage was on their residence in Northampton, Massachusetts (A lovely city by the way). They had purchased the residence in 2001 for $365,000. In 2008 the taxpayers signed another mortgage to TD Bank for $200,000.

During 2009 the couple paid the bank $1,138 and Joan Gross $19,230. They deducted $20,368 as home mortgage interest. The IRS disallowed the $19,230. The IRS did not raise an issue about how the money was spent. In order for all the debt to qualify as home mortgage indebtedness, the couple would have had to have made some improvements to the residence, but nobody was making an issue out of that. The other big requirement to qualify as deductible home mortgage interest is that the indebtedness:

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