Claiming interest from HELOC

I'm in California... parents are in OR.

My parents took out a HELOC about 18months ago. I then borrowed the money from my parents. I pay the payment each month and have it electronically taken from my checking account directly to the loan payment.

I found out this morning that my dad did not claim the interest last year (and is not planning to this year either) on his taxes because he is not the one paying on the loan. I cannot claim the interest because the loan is not in my name. It seems silly to me that my dad does not/can not claim the interest.

Does anyone know whether or not he is still entitled to claim the interest even though he doesn't pay on the loan? He is a by the book sort of guy, so any actual 'proof' would be appreciated.

He can claim the interest as a deduction, but he also has to claim the interest you paid him as income on Schedule B, so it's a wash.

BTW, your interest payment is to your dad, not the bank. You have no obligation to pay the bank. You can write off the interest if it's a business expense or you made home improvements with it, but if you do, you must issue a 1099-int to dad.

I guess I'm a little confused and its probably best just to leave it the way it is. But I will, try to explain my confusion.

My dad isn't charging me interest... I am paying the loan off that was really for me, but in his name. So are you saying that technically the interest that I pay the bank would be considered income, even though my dad is not making any profit... hence the wash? I pay the bank directly and have since it was set up so that my parents didn't have to worry about me forgetting to make a payment. If I set it up to pay my parents directly, then let them make the monthly payment, would they then get to deduct the interest? Or because I used the money for my home not theirs, does that negate the dedution?

Thanks for the reply and help.

Brookenstein said:

I guess I'm a little confused and its probably best just to leave it the way it is. But I will, try to explain my confusion.

My dad isn't charging me interest... I am paying the loan off that was really for me, but in his name. So are you saying that technically the interest that I pay the bank would be considered income, even though my dad is not making any profit... hence the wash? I pay the bank directly and have since it was set up so that my parents didn't have to worry about me forgetting to make a payment. If I set it up to pay my parents directly, then let them make the monthly payment, would they then get to deduct the interest? Or because I used the money for my home not theirs, does that negate the dedution?

Thanks for the reply and help.

Click to expand...

It really negates the deduction. Your father didn't use the money on his own home. He basically borrowed the money in order to lend it to you.

It sort of depends upon how everything is structured. My loan company gave me a free HELOC against paid principal when I refinanced, which was less than the original mortgage principal (@20% down), less than the original appraised value, and within allowable mortgage deductions. So there is no question that anything I would borrow from the HELOC for any reason would be deductable.

However, if it is a cash out refinance, then there are some questions as far as, was it within the deductable mortgage limits, can the total financed be proven to be less than total property value, or was the borrowed amount used to upgrade the property it applied to? Apparently he does not want to bothered with issuing and filing a 1098 form for you and/or proving interest income and deduction he cannot prove he paid.

So consider his risk in giving you a non-deductable unsecured loan at that rate a gift. If you could have secured a deductable loan at that rate, why didn't you?

My parents only owed about $5000 on their house when they took out the HELOC. They took it out to help up with a downpayment on a house. 6 months later we took out a HELOC in plans to pay them back but were only allowed to go to 90% LTV so we still owe about 1/3 of what we initially borrowed.