Paying Taxes on Mortgage Interest Received

When you receive money, you’ll be paying taxes on mortgage interest received, even if the payment is from your son.

Q: My question is on paying taxes on mortgage interest received. Three years ago, my son purchased a house. I am the lender for his mortgage. Last year, unable to resist a low interest rate, I took out a bank mortgage on my own home. Both my son and I pay about $6,000 in interest annually. So, effectively, $6,000 passes into and out of my hands.

Can you Avoid Paying Taxes on Mortgage Interest Payments you Receive

Here’s my question: must I pay tax on the $6,000 worth of interest I receive? Is there a way to avoid paying taxes on mortgage interest. The amount is $6,000 that I receive in mortgage interest? This is significant in my financial situation. I’m retired and that extra income affects the amount I get taxed on social security. I might cost me other tax issues with my part-time job.

A: You pose an interesting question. When we thought about your situation, we were forced to wonder why you both have these loans.

After a year or so, we’d hope that your son would have the financial wherewithal and credit worthiness to apply for his own loan. With a decent credit score, your son should be able to get a 30-year loan carrying an interest rate of less than 3 percent. Recently, we saw a lender advertising a 10-year adjustable loan with an interest rate of 2.125 percent. In this type of loan, your interest rate is the same for the first 10 years. On the 11th year of your loan, the interest rate of your loan will adjust on a yearly basis through the 30th year.

Refinance or Pay Off One of the Loans to Avoid the Paying Taxes on Mortgage Interest Payments

The simple solution to your problem is that your son should go get his own loan and pay off the debt he owes you. Secondarily, your son can probably deduct the interest payments he makes to you as long as he itemizes his deductions. On the other hand, those interest payments are income to you.

Gift The Amount Of The Mortgage Interest Payment Back to Your Son

To avoid this situation, which requires you report the income, we suggest that your son get his own loan. Once he has his own loan, you can decide whether to keep your loan (why did you take it out?) and pay interest on it or pay it off. The interest you pay on your loan may be deductible on your tax return if you itemize your deductions. (For 2020 the standard deduction for an individual is $12,400. So if your deductions or your son’s deductions exceed 12,400, you might get a tax benefit by itemizing your deductions.)

Clearly, the interest you receive as income is placing an economic burden on you. It might affect the taxes you pay across the board. Worse, it’s weighing on you emotionally.

IRS allows a Gift of $15,000 per year without any tax consequences or filings.

If your son can’t refinance his loan, then the two of you should talk about how to handle the $6,000 in interest payments. We know of parents that forgive their kids’ payments to them on loans they may have. The IRS allows you to to give your son up to $15,000 without that gift resulting in any paperwork to either of you or forcing you or your son to pay tax on that money.

We’re not financial planners and can’t give you specific advice in this area. If your son owes you $6,000, you can waive the repayment. At that point, you’ve essentially given him a gift of $6,000 according to the IRS. You wouldn’t have to pay tax on the income. You also wouldn’t have the $6,000 to pay the amount you owe on your loan. Maybe that solves the issue.

But if you want the cash, or need the cash, then your son should try to refinance his loan. At that point, you can repay your own mortgage with the payoff of the debt from your son.