Bought our first home… father-in-law gave us a loan at 7 percent… do we need a 1098

My fiancée and I bought a house this year, and her dad loaned us the money instead of going through a bank. It’s a private loan, but we have a formal agreement, and he’s charging us 7 percent interest. We’re making $1,800 payments every month.

Since he’s basically acting as a bank, does that mean we need to create a 1098 form for tax purposes? Or is that something only he has to handle?

She’s planning to file as head of household and claim her child, but I’ll be the one claiming the house. Just want to make sure we’re doing this right before tax season hits. Appreciate any help!

He has to issue the 1098, not you. Also, I don’t think she can claim head of household in this setup.

And wow… 7 percent from family? You’d think he’d cut you a deal.

Case said:
He has to issue the 1098, not you. Also, I don’t think she can claim head of household in this setup.

And wow… 7 percent from family? You’d think he’d cut you a deal.

Yeah, that was actually my choice. He didn’t care about the rate, and my fiancée wanted to lower it to 3 percent. But we had already been pre-approved at 7 percent by a bank, and for me, it felt like a pride thing. I’ve worked hard to get where I am, and I wanted to treat it like a real mortgage.

That said, he’s already financially set, and if anything happens to him, my fiancée will inherit everything, so it’s possible we’ll end up getting all the interest back in the long run. It’s weird to think about, but we’ve all discussed it openly.

@Riley
I get the pride thing, but why make life harder than it needs to be? One of the benefits of a private loan is that you can adjust the terms if needed. If you ever change your mind, just ask him to lower it to the IRS minimum rate.

@Riley
Only downside is that he’s not reporting it to the credit bureaus, so it’s not helping your credit score.

Case said:
He has to issue the 1098, not you. Also, I don’t think she can claim head of household in this setup.

And wow… 7 percent from family? You’d think he’d cut you a deal.

And I can’t report it either, right? So it just works like before when we were living separately. Does it make sense for me to claim the full interest deduction, or should we split it?

Your father-in-law needs to issue the 1098.

He can use an online calculator to break down how much of each payment is interest versus principal.

Also, this only counts as a mortgage interest deduction if the home is actually used as collateral for the loan.

If the loan is backed by the house, then your father-in-law has to issue the 1098.

Auden said:
If the loan is backed by the house, then your father-in-law has to issue the 1098.

Thanks for the info. Yeah, it works like a regular mortgage—if we don’t pay, he takes the house. I’ll check with him to make sure he sets up the 1098 properly. Time to start googling.

Updated the post to say it’s solved. I think I have enough info to figure out the next steps. Thanks, everyone!

The way you’re filing sounds off. If you’re claiming the house, but she’s filing as head of household, that doesn’t really add up.

Also, is this just a personal loan from him, or is it actually set up as a mortgage with a lien on the property?

@Sawyer
It’s a mortgage, not just a personal loan. There are late fees, and he can take the house if we default.

As for the head of household thing, I figured since we aren’t married yet, it would be like two separate ‘households’ living together. She’s claiming head of household for her and her child, and I’m just claiming the house. Kind of like how roommates file separately.

We split expenses—70 percent me, 30 percent her—but we use a joint account for bills. It’s weird talking about it like this lol.

@Riley
You guys aren’t two separate households, though. You live together, share bills, meals, and finances. That means she probably can’t claim head of household.

Sawyer said:
@Riley
You guys aren’t two separate households, though. You live together, share bills, meals, and finances. That means she probably can’t claim head of household.

Yeah, plus they both contribute financially, and the kid depends on both of them.

@Zeph
That makes sense. I thought not being married changed things, but I guess not. Kind of sucks tax-wise to be together but not married lol.

Sawyer said:
@Riley
You guys aren’t two separate households, though. You live together, share bills, meals, and finances. That means she probably can’t claim head of household.

So then neither of us can claim head of household?

@Riley
Most likely, no.

People are overlooking the fact that while 7 percent is high, he probably wants to get a decent return compared to other investments.

Is this an installment loan, or does it have a balloon payment at the end?

Dang… 7 percent from family? Thought there’d be a little discount lol.