client made a loan to her kids for remodeling their house. Drew up a promissory note, set up a payment schedule with enough interest to satisfy IRS. Kids have been making payments on time (since October) and all goes well. What I need advice on is: Who files a 1099 to report the interest, and is the 1099-INT the correct form. Client intends to report interest income, kids want to deduct interest expense as a HELOC.
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Go to schedule A Interest. There is an area for non financial institution interest paid. It will ask for Name, Address and SS# of the recipient that received the interest.This post is for discussion purposes only and should be verified with other sources before actual use.
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Hi Ellie - Home equity debt is defined in Pub 936 as:
"Home equity debt is a mortgage you took out after October 13, 1987, that:
Does not qualify as home acquisition debt or as grandfathered debt, and
Is secured by your qualified home."
So, was the loan secured by the home? If not, your client will end up with taxable interest and the kids will have non-deductible interest - as though they used a credit card to remodel their home. In that case, I think the interest could be added to the basis of their home but not deducted as HELOC interest.
I could be wrong. Here's a link to Pub 936:
Comment
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The non-deductible interest can not be added to basis under ยง1.266-1 because the property is neither unimproved nor under improvement at this time.Comment
Comment