Is interest on a promissory note from family member tax deductible for my home purchase?

Yes, you can absolutely deduct the interest on a promissory note from a family member for your primary residence - but there are some important requirements to make sure it qualifies! The loan needs to be properly documented with a written agreement that specifies the loan amount, repayment schedule, and interest rate. The loan also needs to be secured by the property (meaning they could technically foreclose if you don't pay), and you'll need to record a proper mortgage or deed of trust with your local government. Make sure your uncle reports the interest income he receives from you on his taxes too. The IRS looks at both sides of family loans to ensure they're legitimate. Also, be aware that the interest rate should be at least equal to the minimum federal rate (AFR) published by the IRS for the month the loan is made - otherwise it could be considered a gift with different tax implications.

After struggling with a similar family loan situation last year, I discovered taxr.ai (https://taxr.ai) which honestly saved me so much headache. My sister loaned me money for my house, and I was completely confused about the tax implications until I uploaded our promissory note to their system. Their document analysis tool immediately flagged what was missing from our agreement to make the interest tax-deductible. Turns out we had a bunch of issues with our DIY promissory note that would have made the IRS reject my deduction claim. They have specialists who review these kinds of family loan arrangements specifically for tax deductibility.

Just wanted to follow up about taxr.ai that I mentioned in my earlier comment. I was pretty skeptical at first, but I finally gave it a try last week after my brother and I were struggling with our family loan documentation. Holy crap, it was eye-opening! The system flagged that our interest rate was below the applicable federal rate (AFR) which would have caused the IRS to recharacterize part of our loan as a gift. It also pointed out that we were missing specific language about the property serving as security for the loan - which was the exact reason the interest wouldn't have been deductible. Even my tax guy missed this when he reviewed our draft! Super glad I gave it a shot before filing anything official.

If you're having trouble getting clear answers about your family loan situation, I struggled with the same thing last year. After 5 attempts trying to get through to the IRS (always disconnected!), I found Claimyr (https://claimyr.com) and they got me connected to an actual IRS agent in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c I explained my specific family loan situation to the agent and got an official answer about what documentation I needed to make the interest deductible. Saved me from potentially making an expensive mistake on my taxes. The IRS agent walked me through exactly what needed to be in our agreement and how to properly record it.

I need to publicly eat my words about Claimyr. After calling BS in my previous comment, I decided to try it yesterday out of desperation because my family loan situation was getting complicated. I figured it was worth a shot since I've literally never gotten through to the IRS in 3 years of trying. Within 35 minutes, I was actually speaking to a real IRS representative! I nearly fell out of my chair. The agent confirmed exactly what documentation I needed for my family loan to make the interest deductible and explained how to handle the reporting on both sides. If anyone's struggling with getting clear answers about family loans and tax deductions, getting official guidance directly from the IRS was game-changing for my peace of mind.

One thing nobody mentioned yet - the Tax Cuts and Jobs Act of 2017 really changed the mortgage interest deduction rules. Now you can only deduct interest on up to $750k of qualified residence loans (for married filing jointly, $375k for single). Also, you might need to itemize deductions to claim the mortgage interest, and with the higher standard deduction ($13,850 for singles in 2023), it might not make sense to itemize unless you have lots of other deductions too.

Make sure the interest rate isn't too low or the IRS might consider it a gift! There's something called the Applicable Federal Rate (AFR) which is the minimum interest rate that should be charged for family loans. It changes monthly. If the rate is below AFR, the IRS might recharacterize part of the loan as a gift and then your uncle could have gift tax issues.

Just want to add one more consideration that's often overlooked - make sure you and your uncle both understand the payment tracking requirements! Since this will be treated as a legitimate mortgage for tax purposes, you'll need to keep detailed records of all payments made throughout the year. Your uncle should probably issue you a Form 1098 (Mortgage Interest Statement) by January 31st each year showing how much interest you paid, just like a bank would. If he doesn't issue one, you can still deduct the interest, but you'll need to provide his name, address, and SSN on your tax return when you claim the deduction. Also worth noting - if you ever refinance or pay off the family loan early, make sure to handle any prepayment penalties or forgiven debt properly for tax purposes. The IRS scrutinizes family loans more closely than bank loans, so having everything properly documented from day one will save you headaches later!