Home Owners Must be Aware of Tax Deduction Laws & Rules

Those seeking their first Florida home loan often have one thing in common: they need help coming up with the money. Some individuals turn to banks for a loan, but many look to their family for financial assistance.

If you fall into the second category, the following exchange could serve as an important lesson when it comes to real estate tax deductions:

DEAR BOB: Last year, my wife and I loaned our daughter and son-in-law the money they needed to buy their first home. We weren’t earning much on the money and they offered to pay us 5 percent interest. It was a good deal for them and a good deal for us.

They faithfully pay us the monthly interest and principal. However, when they had their income taxes prepared, their tax adviser told them that the approximately $32,000 of interest they paid us in 2005 is not tax-deductible because it is an unsecured loan, which is not recorded against their title. Please tell us this isn’t true. — Gregg G.

DEAR GREGG: Their tax adviser is correct. For your daughter and son-in-law to deduct the interest payments paid to you as itemized home mortgage interest, the loan obligation must be secured by a recorded mortgage or deed of trust against their home.

Although you and your wife must report on your tax returns the interest income received, the borrowers are not entitled to deduct it as home mortgage interest because the loan isn’t secured by their residence. However, this can be corrected for 2006 by their signing and recording a mortgage or deed of trust to secure the promissory note they gave to you.

As you consider a Florida home loan, keep this story in mind. Fortunately, there are new tax incentives for current home owners and builders.