When a relative lends you money

May 16, 2008

I want to buy a second home but am short $50,000. My uncle has offered to lend me the money at a better rate than I can get from a bank. If I accept, will I be able to deduct the interest I pay him?

I want to buy a second home but am short $50,000. My uncle has offered to lend me the money at a better rate than I can get from a bank. If I accept, will I be able to deduct the interest I pay him?

Yes, as long as the loan meets the definition of a "secured" debt. That means the home must be the collateral for the debt so it can serve as repayment if you default on the loan, and your uncle must legally record the loan in accordance with local or state law. But your uncle also must charge you interest that's at least equal to the applicable federal rate set by the IRS. The rate fluctuates monthly, and the one that you'll use depends on the terms of the loan. Your local IRS office can provide the appropriate rate.