Real Estate Tips from Bob Rich-Lending Deposit to Child

QUESTION: My husband and I want to lend money to our son and his wife to help them buy a house. Are there any tax implications?
ANSWER: Yes. Make sure that your son and daughter-in-law can deduct the interest they pay you. You can do this by hiring a lawyer to draft a mortgage agreement. Drawing up a simple I.O.U instead of a mortgage will not suffice. The reason for this is that interest on a mortgage secured by a principal residence is fully tax deductible. Interest on a personal loan is not.
If you charge your son and daughter-in-law the fair market interest rate, they will be able to deduct the interest they pay you from their taxable income. Of course, you must report the interest YOU collect as taxable income.
The rules are much more complex if you loan children more than $10,000 and charge a below-market interest rate or none at all. Consult an accountant if this is your intention.
Contact The Rich Company in Washington, North Carolina for your real estate questions and concerns.