interest deduction

[bstaxes]

Client wants to take a loan to help their child buy an asset (equipment) for the child's business. The child will pay the loan. Can the child take the interest on the loan off on a sch f? The child will probably take the depreciation of the equipment. My client will not take the interest on their sch A (loan is against the clients home, home equity). I know the IRS doesn't care if you take a smaller deduction or no deduction on your return. I am concerned about the child's return showing interest from a 1098 belonging to the parent. Can the child put an attachment to the sch f explaining that the child is paying the loan off and would be entitled to the deduction?

Different topic, went back an check cch message board and I am still getting the "closed message". I did notice that I was not logged in so I did log in and got the same message. Technology is great but today has been one of those days- email was corrupt and spent 2 hours on the phone with a nice gentleman too bad he was in India. He could not fix the problem unless I was willing to lose all my e-mail. Said NO and played with it myself. Found solution reverse order of the e-mail and move the good files out and delete the folder with the corrupt e-mail. Sometime I could wish for the good old days.

Thanks for letting me vent and for any ideas on the interest problem.

[Julie]

As I understand it, there are two things required to deduct interest:

1. You must owe the money.

2. You must pay the money.

If there is no one who both owes and pays the money, the deduction may be lost. That's the problem here, as I see it. The parents owe the money, but the child is paying it.

If the child's name is on the loan (even as a secondary borrower), then the child can deduct the interest, regardless of whose house is securing the loan.

Another possible way to do this, if the parents cannot (or don't want to) get the child's name on that loan, would be for the parents and child to structure this as a formal loan, with interest equal to that being paid on the home loan. Then the child is paying interest to his parents, who claim it as interest income and deduct it on Sch A. It's all a wash, but the paperwork will all be in line.

Client wants to take a loan to help their child buy an asset (equipment) for the child's business. The child will pay the loan. Can the child take the interest on the loan off on a sch f? The child will probably take the depreciation of the equipment. My client will not take the interest on their sch A (loan is against the clients home, home equity). I know the IRS doesn't care if you take a smaller deduction or no deduction on your return. I am concerned about the child's return showing interest from a 1098 belonging to the parent. Can the child put an attachment to the sch f explaining that the child is paying the loan off and would be entitled to the deduction?

Different topic, went back an check cch message board and I am still getting the "closed message". I did notice that I was not logged in so I did log in and got the same message. Technology is great but today has been one of those days- email was corrupt and spent 2 hours on the phone with a nice gentleman too bad he was in India. He could not fix the problem unless I was willing to lose all my e-mail. Said NO and played with it myself. Found solution reverse order of the e-mail and move the good files out and delete the folder with the corrupt e-mail. Sometime I could wish for the good old days.

Thanks for letting me vent and for any ideas on the interest problem.

[kcjenkins]

Client wants to take a loan to help their child buy an asset (equipment) for the child's business. The child will pay the loan. Can the child take the interest on the loan off on a sch f? The child will probably take the depreciation of the equipment. My client will not take the interest on their sch A (loan is against the clients home, home equity). I know the IRS doesn't care if you take a smaller deduction or no deduction on your return. I am concerned about the child's return showing interest from a 1098 belonging to the parent. Can the child put an attachment to the sch f explaining that the child is paying the loan off and would be entitled to the deduction?

The parents can do a wraparound loan to the child, who then pays them and they pay the mortgage. They give the child a 1098 Int for the interest he pays them, which they show as income. They then deduct the interest that they pay the bank. So they net out, except for the effect on their AGI from his interest, which should only affect medical and misc deductions for them. And he gets to deduct his interest.

Alternatively, and better, in my option, he could get the loan from the bank, with his parents co-signing his loan. Same liability to the parents, but the loan is in the child's, or the child's business, name, building his credit, and also he is slightly more likely to make his payments timely, since it is between him and the bank. Kids do tend to assume that they can pay their parents last, or late, or skip a payment now and then, etc.

[TAXBILLY]

Form 1098 is only issued in the course of a trade or business. The parents are not.

taxbilly

[kcjenkins]

While it is true that an individual who makes a loan as a personal action, and is not in the loan business, is not REQUIRED to issue the 1098, it is OK for them to do so. And if they were my clients I would prepare it, simply to make the loan seem more 'official' to the child, and also to make it clear to both sides exactly how much to report.

[RJM]

Also, if the mortgage loan already exists, the parents can file an election on the next return to NOT treat the loan as a mortgage, so they do not have any $100,000 home equity loan limit problems, if applicable. The election is made under Reg Sec 1.163-10T(o)(5), as a simple statement attached to the return.

[Don in Upstate NY]

... So they net out, except for the effect on their AGI from his interest, which should only affect medical and misc deductions for them. ...

And the taxability of any social security the parents are receiving.