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I'm trying to buy a house that's listed as not inhabitable in its current state. I want to buy it so I can repair it and live in it.

I have all the financials I need, and I have excellent credit, but I'm having difficulty getting the loan since the house is marked as not inhabitable. Due to how all the loans are structured, I'd have to have a licensed contractor do the work for the banks to do the loan, which defeats the purpose of me buying the house.

I can get around this by borrowing money not through a bank, but I was curious if I did this, would the interest would still be tax deductible? Or, would the loan have to be through an official bank for it to be tax deductible?

I realize that for the loan there has to be some documentation showing the loan is a real loan, and not just gifting money.

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As usual, when there's a tax related question without a location tag - assume only the USians will be as arrogant... Correct me if I'm wrong, though. –  littleadv Mar 3 at 1:48
    
@littleadv OP's other question mentioned the IRS, so a safe bet. –  Chris W. Rea Mar 3 at 2:10
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1 Answer 1

up vote 9 down vote accepted

For your mortgage to be tax deductible there's no requirement on who the lender should be.

The requirement is that the mortgage is secured by your primary residence and is used to buy or improve such. If you can show the documentation for the loan and the actual interest paid, and if you can show that the proceeds were used to buy and/or improve your primary residence - you should be able to claim the interest paid as deduction on Schedule A. See instructions.

Keep in mind, that in order for your interest to be deductible, the receiver (lender) must also properly document and declare it on their own tax return. If they evade taxes on the interest, your own deduction may be disallowed. To ensure that your lender does in fact report everything properly, you should ask for form 1098.

Pay attention: if your lender doesn't provide you with the form 1098 - your interest goes on a different line of schedule A (line 11 and not line 10), and details about the lender may be required.

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