For many buyers obtaining a mortgage from a lender is just not an option but many home buyers are looking into borrowing money from a friend or family member, however, there are mistakes that can be made in this transaction. Take the situation that a Massachusetts couple had when they borrowed over $400,000 from their mother in order to purchase a home. Everything was going along perfectly and they even paid the mother interest in which they deducted on their tax return. (Mortgage interest and property taxes can be deducted from your taxes annually) but unfortunately this Massachusetts couple made a grave mistake. They forgot to record the loan.
Although they are not legal experts the best option would’ve been to consult a lawyer when drawing up the paperwork and recording the deed. In 2009, this couple paid over $19,000 in interest to their mother which they naturally deducted on their tax return. However, the Tax Court and the IRS rejected this tax deduction due to the fact that the couple failed to record their mortgage or in other words “perfect it”.
According to inman.com “for home mortgage interest to be deductible, the homeowner must have secured debt. Secured debt is the debt that is on the security of any instrument (such as a mortgage, deed of trust, or land contract):
… That makes the interest of the debt in the qualified residence specific security of the payment of the debt, under which, in the event of default, the residence could be subjected to the satisfaction of the debt with the same priority as the mortgage or deed of trust in the jurisdiction in which the property is situated, and that it is recorded, where permitted, or is otherwise protected in accordance with applicable state law.”
This couple simply forgot to record the mortgage which literally is just $20 or $30 to record a few pieces of paper with the county recorder.
The good news in all of this is that the Tax Court took a little bit of pity on this couple and ruled that they were not liable for a 20% accuracy related tax penalties that the IRS had imposed. And the moral to this story? Make sure you seek legal advice or expert assistance when doing any type of legal or real estate related especially mortgage information on your own.