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Interest received as income has retiree worried about financial situation

Interest received as income has retiree worried about financial situation

Q: Three years ago, my son purchased a house. I am the lender for his mortgage. Last year, unable to resist a low interest rate, I took out a bank mortgage on my own home. Both my son and I pay about $6,000 in interest annually. So, effectively, $6,000 passes into and out of my hands.

Here’s my question: must I pay tax on the $6,000 worth of interest I receive? Is there a way to avoid being taxed on the $6,000 I receive? This is significant in my financial situation. I’m retired and that extra income affects the amount I get taxed on Social Security and might cost me other tax issues with my part-time job.

A: You pose an interesting question, but when we thought about your situation, we were forced to wonder why you both have these loans.

After a year or so, we’d hope that your son would have the financial wherewithal and credit worthiness to apply for his own loan. With a decent credit score, your son should be able to get a 30-year loan carrying an interest rate of less than 3%. Recently, we saw a lender advertising a 10-year adjustable loan with an interest rate of 2.125%. The rate was fixed for the first 10 years and then would adjust on a yearly basis through the 30th year.

The simple solution to your problem is that your son should go get his own loan and pay off the debt he owes you. Secondarily, your son can probably deduct the interest payments he makes to you as long as he itemizes his deductions. On the other hand, those interest payments are income to you.

To avoid this situation, which requires you report the income, we suggest that your son get his own loan. Once he has his own loan, you can decide whether to keep your loan (why did you take it out?) and pay interest on it or pay it off. The interest you pay on your loan may be deductible on your tax return if you itemize your deductions. (For 2020 the standard deduction for an individual is $12,400. So, if your deductions or your son’s deductions exceed $12,400, you might get a tax benefit by itemizing your deductions.)

Clearly, the interest you receive as income is placing an economic burden on you. It might affect the taxes you pay across the board. Worse, it’s weighing on you emotionally.

If your son can’t refinance his loan, then the two of you should talk about how to handle the $6,000 in interest payments. We know of parents that forgive their kids’ payments to them on loans they may have. You are entitled to give your son up to $15,000 without that gift resulting in any paperwork to either of you or forcing you or your son to pay tax on that money.

We’re not financial planners and can’t give you specific advice in this area, but if your son owes you $6,000 and you waive the payment, you’ve essentially given him a gift of $6,000 according to the IRS. You wouldn’t have to pay tax on the income; but, then, you wouldn’t have the $6,000 to pay the amount you owe on your loan. Maybe that solves the issue.

But if you want the cash, or need the cash, then your son should try to refinance, and you can repay your own mortgage with the payoff of the debt from your son.

(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through their website,

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