Michael S asked:
I am about to ask a relative for a loan to purchase a land parcel for a future home site. I am going to pay back the loan plus interest just as if it were from a financial institution. Is the interest tax deductible? What paperwork would we have to draw up? What forms would be required? Would he/she have to pay income tax on the earnings?
I am about to ask a relative for a loan to purchase a land parcel for a future home site. I am going to pay back the loan plus interest just as if it were from a financial institution. Is the interest tax deductible? What paperwork would we have to draw up? What forms would be required? Would he/she have to pay income tax on the earnings?
The interest could be deductible–it depends. If the land is deemed investment property, you may be able to deduct it as investment, assuming you have investment income. If it is to be income-producing property, it would be deductible once rental property were constructed and placed on the rental market. No particular paperwork needed in these instances. If, however, you intend to use this for your personal residence or vacation home, the interest is deductible, again once construction is done. You’ll need to have a note and deed of trust recorded at the local register of deeds office for the interest on the loan to qualify for deduction.
The other answer already given is correct. In the answer to your other question is yes. The person you are paying the interest to DOES have to claim it as income. There are some companies that for a fee will help make the transaction very very legal and do all the contracts. The person lending the money can deduct these fees against the interest earned. I have included one link below. There are others if you look around on the internet.