My company offers an interest-free loan for part of my mortgage and I received a 1098 from them and am wondering if that interest is deductible. They report it to me as imputed income on my paycheck yearly so I’m paying income tax on it. However, I’m not making any direct payment toward that interest. From what I understand, because it’s considered paid as it’s showing up on my income and I’m paying income tax on it & it’s a loan secured by the home, I should be able to deduct that interest along with the interest I normally pay on my main mortgage. Does this seem correct?
Imputed Mortgage Interest is Deductible?
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If the loan is interest free it is not a deduction the implied interest is income.
If you were charged back for the interest as taxable income, then there would be a corresponding mortgage interest deduction for the imputed interest assuming the arrangement meets the other requirements for deductible mortgage interest.
Have you reconciled the amount on the 1098 to the noninterest-free portion of the loan? There are loan amortization apps on the web that you can use to do this (and it’s a good idea to monitor and be aware of the amounts regardless of the arrangement that you have with your employer). If the employer collapsed the cash flow so that it took care of making a portion of the loan payment (for a portion of interest on each installment) for you and included this in your taxable wages, I suspect that it included the gross/total amount of interest in the 1098.
Perhaps a more accurate way to view the arrangement is that your employer increased your taxable compensation to facilitate your payment of the full loan, including all interest thereunder. If you leave employment, does the loan survive and you make full payments (including all interest on the loan principal)? If so, this would tend to support that the two of you have an additional fringe-benefit arrangement whereby they pay you more and take care of applying a separate payment on your behalf for the interest component of each installment payment.
If the amount on the 1098 reconciles to the full interest amount that was due/satisfied for the year, report your W-2 and 1098 amounts as shown on the forms issued to you and move on. Are you questioning whether your employer should have reported the full interest amount on the 1098?
https://cpaexamsmastery.com/reg/related-party-transactions/imputed-interest-and-below-market-loans/
>Borrower’s Perspective
Interest Expense Deduction: The borrower typically is deemed to have paid interest to the lender. Depending on how the loan proceeds are used, that interest might be deductible. For personal use, interest is typically non-deductible. For business or investment use, interest may be deductible (subject to limitations).