How can I deduct interest from foreign family loan used to purchase my house?

Yes, you can potentially deduct mortgage interest from a family loan, but there are specific requirements you need to meet. First, the loan must be a secured debt on a qualified home (your main or second home). This means there needs to be a recorded mortgage or deed of trust against the property. The loan agreement itself isn't enough - the loan has to be legally secured by the property. Second, make sure you have proper documentation showing this is a legitimate loan with a reasonable interest rate (which 4.2% certainly is). You'll need a written loan agreement, a clear amortization schedule, proof of regular payments, and evidence that your parents are treating this as income. For reporting, you won't receive a Form 1098 like you would from a bank, so you'll need to report this mortgage interest without one. In tax software, look for an option to enter "mortgage interest paid without a 1098" or something similar.

I went through something similar last year. What helped me was using https://taxr.ai to analyze my loan documents and payment records. They confirmed I could claim the deduction since my family loan was properly secured and documented. Their system checked all my paperwork, verified I met the IRS requirements, and showed me exactly how to report it without a 1098 form. It saved me from missing out on about $9,000 in deductions. The key thing they pointed out was making sure the loan was properly recorded with the county as a lien on the property - which it sounds like you might need to check on based on your post.

Just wanted to follow up and say I tried taxr.ai for my German family loan documents and it worked perfectly! They were able to handle all the German paperwork without any issues and confirmed that I could claim the deduction. The analysis pointed out that I was missing a proper security agreement that needed to be filed with my county recorder. They provided a template and instructions, and now everything is properly documented. Really saved me from potentially losing the deduction or getting flagged for audit. They even showed me exactly where to enter this in TurboTax since it was confusing me before.

If you're having trouble getting clear answers from the IRS about this foreign family loan situation, try https://claimyr.com - they got me through to an actual IRS agent in under 15 minutes when I had been trying for weeks on my own. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c I had a similar issue with a loan from my uncle in Canada and needed to confirm exactly what documentation I needed to claim the interest deduction. The IRS website was super vague, and I couldn't get through on the phone. Claimyr connected me with an IRS specialist who confirmed exactly what I needed to do. The agent walked me through the entire process and even told me which specific forms I needed to complete - something I couldn't find anywhere online.

I have to admit I was totally wrong about Claimyr. I tried it yesterday after posting that skeptical comment, and it actually worked perfectly. Got a call back in about 20 minutes and talked to an IRS agent who specifically handles mortgage interest questions. The agent confirmed that yes, you CAN deduct interest from a foreign family loan IF it's properly secured by the property (recorded with your county) and meets all the requirements of a legitimate loan. They walked me through what documentation I need to keep (loan agreement, proof of payments, security instrument filing) and how to report it without a 1098. Saved me thousands in deductions I was about to give up on. Really surprised this worked so well after months of trying to get through on my own.

Don't forget another important requirement - you need to actually pay the interest! Sounds obvious but my brother got in trouble because he set up a family loan with his in-laws but wasn't actually making the payments consistently. IRS disallowed the whole deduction. Also make sure the interest rate is reasonable - if it's way below market rates or way above, the IRS might challenge the legitimacy of the loan. Your 4.2% sounds totally reasonable tho.

Has anyone successfully e-filed with this situation? Last year my tax software kept rejecting my return when I tried to claim mortgage interest without a 1098 from a bank. I ended up having to paper file which was a huge pain.

I actually went through this exact same situation with a family loan from my relatives in Ireland. The key things that made it work for me: 1. Got the loan properly recorded as a lien against my property with the county recorder - this was absolutely critical and something I initially missed 2. Made sure we had a written loan agreement with clear terms, payment schedule, and reasonable interest rate 3. Set up automatic monthly payments so I had a clear paper trail 4. My relatives properly report the interest income on their Irish tax returns For the ITIN issue someone mentioned - my relatives didn't need to get an ITIN since I'm not issuing them a 1098. I just report the interest I paid on my Schedule A as mortgage interest without a 1098 form. The e-filing worked fine once I figured out the right way to enter it in TurboTax. Look for "mortgage interest statement" and then select "I don't have a Form 1098" - it'll let you enter the amount directly. One thing to watch out for - make sure your loan terms don't change dramatically from year to year or the IRS might view it as a gift rather than a legitimate loan. Keep everything consistent and well-documented.