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Hello All:
My wife and I area borrowing money from my parents. We've had an attorney draw up a loan documented, which includes the following clause:

As security to ensure prompt payment of this Note, Maker shall grant a second priority security interest encumbering the real property known as [address name].

Does this make the interest deductible? There will be no documents filed with the registry of deeds / land court, so does it not meet this requirement:"•Is recorded or is otherwise perfected under any state or local law that applies."

Thanks!
William
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My wife and I area borrowing money from my parents. We've had an attorney draw up a loan documented, which includes the following clause:

As security to ensure prompt payment of this Note, Maker shall grant a second priority security interest encumbering the real property known as [address name].

Does this make the interest deductible? There will be no documents filed with the registry of deeds / land court


According to Pub 936 the encumbrance must be recorded, so IMO this doesn't work.

Phil
Rule Your Retirement Home Fool
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Why would you not record the loan?
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vkg: "Why would you not record the loan?"

I do not know wrjohnston91283, and cannot speak for him, and do not want to cast aspersions, but to me the two most obvious reasons are (1) the first lender does not know about the loan or (2) the first mortgage/deed of trust prohibits subordinate liens and recording would trigger a default.

Just my $0.02 (and not directed at the OP).

Regards, JAFO
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(2) the first mortgage/deed of trust prohibits subordinate liens and recording would trigger a default.

I readily admit that I've only seen a few loans (my own) - but I've never heard of a mortgage that prohibits subordinate liens.
So that doesn't seem likely to me.

The reasons I would guess:
1> it can become an extra obstacle if after it's recorded the owner wants to refinances the 1st.
2> It costs some small amount to record it - (I think in my county it's $20 or $40 or something)
3> the income being received from interest on the loan isn't being documented for IRS, and they're avoiding documenting anything so that it's less visible to the IRS. (hopefully that's not true)
4> didn't want to spend the hour or two dealing with it.
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4> didn't want to spend the hour or two dealing with it.

It's number 4. The loan amount is small enough and the rate low enough that the interest amount will be fairly low - less than $4K in the first year. It's entirely possible that even if it were deductible, our itemized deductions would still be less than the standard deduction. We plan on paying it down as soon as possible.

Taxes will be paid on the interest. My parents leave plenty of tax breaks on the table to avoid having a more complicated return that could raise their audit likeliness, so the last thing they would do would be not declare it as income. They are making more off this loan than they are with the money sitting in treasuries or money market accounts, so its win-win for them even after paying the taxes.

Thanks for the responses everyone

William
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