Reporting mortgage interest that has been received on your return?

I see there is lots of confusion. Despite the fact this is a fairly common arrangement. Some parents loan $100K to their children, then cancel it $13K per year. (Others make the loan and are paid back. My parents did it because it was win-win. My sister got a loan for a lower interest rate than the bank was charging; my parents got a higher interest rate than their other investments. My parents only complaint was my sister paid it back faster than they expected her to.)

1. The parent did NOT gift the money to the child. They loaned it to them. As a loan, there is interest income--whether it is stated in the loan or imputed. This is income to the parent and a possible interest deduction to the child. If imputed, the interest is calculated as having been paid on 12/31 of each year.

The minimum interest rate is shown in the AFR tables at the time the loan is made.

2. The parent lists the interest income on his tax return on schedule B. He enters the name of the child and their SSN to document it. The parent does NOT issue a 1098. The parent may be "The Bank of Mom and Dad" but they are not a bank regulated by the state.

3. If the loan was RECORDED (very important step), the child can then deduct the interest on his schedule A using a different line, documenting the interest by entering dad's name and SSN.

See "gift loan" in publication 550. See instructions for schedule A and B.

All interest gets reported in the same way as bank interest. Schedule C is only for business income or work as an independent contractor.

They can't issue a 1098, and the child can't deduct the interest unless the loan was recorded.

The same as interest that was received from any source BUT will need to identify the payer with name and SSN for that purpose and time during the 2014 tax filing season for the 2013 1040 income tax return.

Hope that you find the above enclosed information useful. 12/27/2013

This makes no sense. A Form 1098 reports mortgage interest paid. What the neighbor provided based on your narrative is a gift.

schedule A, as interest.