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Personal Finance (Not Investing) • Deducting interest on a loan taken out to write a mortgage note (intra-family loan)

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Looking for validation on my intra-family loan/creative financing idea

A family member is having a hard time finding a property he can afford. As a family we are pretty handy so I am looking at fronting cash to help him buy a distressed (i.e. not eligible for traditional financing) property. With the idea that once it's been rehab'ed he'll refinance into a traditional mortgage (yes...definitely some risk on this part).

I've reviewed a few different options like just buying the property and then selling it to him after it's fixed, but it seems like the cleanest solution is for me to loan him cash for the purchase and to secure the loan with a note. My understanding is nothing "weird" happens with taxes as long as we charge at least the AFR on the note. I'm open to other ideas here.

I have about $150k in liquid cash, and ~$300k in home equity I can tap. I'm looking to loan out about $250k. So I'll need to borrow at least something to make this work.

Let's say I want to preserve my liquid cash, so I get a HELOC on my property and take out $250k @ 8%. One local credit union here charges interest only for the first 10 years, so let's say I turn around and write an interest only mortgage at 8% with a balloon payment at 5 years (or something...lots of options here. I will have an attorney draft it.).

That seems pretty good, but now I am looking at an extra $36k in interest income over 12 months. Now the meat of the question...since I am charging at least AFR, then as I understand it the IRS considers this an arm's length loan, which is generating income. To earn this income, I took out a loan on which I'm paying interest...so can I deduct my HELOC interest as investment income? It seems too easy.

I am pretty risk averse but feeling reasonably comfortable with this idea. My total net worth is ~1.2m, and $170k of that in FDIC insured savings or treasury bonds, health HSA balance, plus other sources I can tap without penalty. And there are some other family members involved helping out here. I'm open to other ideas here or pointing out risks I may not have considered.

Statistics: Posted by mattjm — Sun May 19, 2024 11:45 pm — Replies 0 — Views 42



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