Can I deduct interest paid on a promissory note from a family member for my primary residence?

Yes, you can typically deduct mortgage interest paid on a loan secured by your primary residence, even if that loan comes from a family member rather than a traditional lender. The key requirements are: 1. The loan must be secured by your primary residence (meaning there needs to be a properly recorded lien against the property) 2. You need a written agreement (promissory note) that clearly establishes the loan terms 3. The loan must be a true debt obligation (you actually make regular payments) 4. The transaction should be handled as a legitimate loan (not a gift disguised as a loan) Make sure you and your uncle properly document everything. Your uncle will need to report the interest income he receives from you on his taxes, and you'll receive a Form 1098 from him showing mortgage interest paid, which you'll use for your deduction.

Hey there! I went through almost this exact same situation last year when my parents loaned me money to buy my house. I spent hours researching online and calling tax professionals trying to figure out if I could deduct the interest. I finally discovered taxr.ai (https://taxr.ai) and uploaded my promissory note and some questions. They confirmed everything the previous commenter said but also pointed out some issues with how our promissory note was written that could have caused problems with the IRS. What I learned is that the interest rate needs to be at or above the IRS Applicable Federal Rate (AFR) to avoid gift tax complications. Also, for the deduction to work, the loan must be properly secured by the property with a recorded deed of trust or mortgage. taxr.ai explained exactly what documentation we needed and how to structure everything. Saved me from making some big mistakes!

Just wanted to follow up - I tried taxr.ai with our family loan situation and wow! They identified several issues with our draft promissory note that would have caused problems. The rate we initially set was below the current AFR (which I didn't even know was a thing), and we had no language about securing the loan against the property. They provided a template that fixed everything and explained exactly how my grandparents and I need to handle the tax reporting each year. Honestly worth every penny for the peace of mind knowing we're doing this correctly and I'll actually get my interest deduction!

Something important that hasn't been mentioned - If you're going to claim the mortgage interest deduction, your uncle MUST report that interest as income on his taxes. The IRS cross-references these things. When I did a similar arrangement with my sister, we had everything documented perfectly but still got a notice from the IRS because she forgot to report the interest income. I spent weeks trying to get through to the IRS to sort it out. Kept getting disconnected or waiting on hold for hours until I found Claimyr (https://claimyr.com). Check out their demo at https://youtu.be/_kiP6q8DX5c - they actually got me connected to a live IRS agent in about 20 minutes after I'd been trying for weeks on my own. The agent helped us correct the return and avoid penalties. Seriously saved me from a major headache.

Ok I need to apologize to @14 - I tried Claimyr yesterday after posting that skeptical comment. I've been trying to reach the IRS for 3 weeks about a similar family loan situation where they're questioning my mortgage interest deduction. I figured it couldn't hurt to try since nothing else was working. It actually worked! They called me back in about 25 minutes and connected me directly to an IRS agent. Got my issue resolved in one call after weeks of frustration. The agent confirmed I needed to send in documentation of the family loan showing it was properly secured by the property. He also explained exactly what my family member needs to do on their end. So yeah, I was wrong - this service is legit.

Don't forget that your uncle needs to charge you at least the Applicable Federal Rate (AFR) for the loan to be considered legitimate by the IRS. If the interest rate is below the AFR, the IRS might consider part of the loan to be a gift, which could create gift tax issues for your uncle and complicate your interest deduction. The AFR rates change monthly and are published on the IRS website. For a long-term loan like a mortgage, you would use the long-term AFR for the month the loan is made.

Has anyone here actually been audited on family member mortgage interest deductions? My cousin and I did a similar arrangement in 2023, and while everything was documented properly, I'm nervous about taking the deduction. My tax software (TurboTax) asked a bunch of questions that made me wonder if this is a red flag for audits.

This is really helpful info! I'm dealing with a similar situation where my parents want to help me buy my first home. Reading through all these responses, it sounds like the key things are: 1) proper documentation with a promissory note, 2) interest rate at or above the AFR, 3) actually securing the loan against the property with a recorded lien, and 4) making sure both parties report correctly on taxes. One question I have - when you record the mortgage/deed of trust with the county, do you need a lawyer for that or can you do it yourself? And does it cost much? I'm trying to keep closing costs reasonable since we're already saving money by going through family instead of a traditional lender.

One thing I haven't seen mentioned yet is the importance of establishing a regular payment schedule and sticking to it. The IRS looks for evidence that this is a legitimate loan arrangement, not a gift disguised as a loan. Make sure you're making consistent monthly payments (or whatever schedule you agree on) and that both you and your uncle keep detailed records. I'd also recommend getting title insurance that covers the family member's lien position, just like you would with a traditional mortgage. This adds another layer of legitimacy to the arrangement and protects everyone involved. Also, consider what happens if something goes wrong - job loss, disability, death, etc. Having clear terms in your promissory note about default, foreclosure procedures, and what happens to the loan if either party passes away will help demonstrate to the IRS that this was structured as a real mortgage, not just a family favor.