Homeowners lose out on tax-deductible mortgage interest

Learn why loan from parents doesn't qualify

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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. Purchase Bob Bruss reports online. Although you and your wife must report on your tax returns the interest income received, the borrowers are not entit...