Who sends the 1098 on a family or seller-financed home loan?

What the IRS actually requires

Form 1098 is the mortgage interest statement banks send every January. The instructions say you must file it if you “are engaged in a trade or business and, in the course of such trade or business, you receive from an individual $600 or more of mortgage interest.” The IRS gives two examples that frame the line well: a real estate developer that finances home sales in its own subdivision must file, but a physician who lends money to the buyer of the physician’s former home does not, because lending isn’t part of the physician’s business.

So in a typical family loan, or when you sell your own house or land and carry the note, you’re usually the physician, not the developer. That’s the good news: there’s no IRS form to file. The catch is that the work a bank’s 1098 does for its borrowers, giving both sides one agreed-upon interest number, now falls on the two of you.

The borrower’s side: Schedule A, line 8b

When there’s no 1098, the borrower deducts mortgage interest on Schedule A, line 8b, “Home mortgage interest and points not reported to you on Form 1098.”

If you bought the home from the person you’re paying (a seller-financed sale), the IRS also requires you to list the seller’s name, address, and taxpayer identification number next to line 8b, and to give the seller your Social Security number. Each failure can cost a $50 penalty. If a relative lent you cash to buy from someone else, that specific rule doesn’t apply, but keeping the same information on file is good practice.

The deduction only works if the loan qualifies. In plain terms, it must be secured by the home with a mortgage or deed of trust that is recorded (or otherwise perfected) under state law, the home must be your main or second home, you must actually pay the interest, and you must itemize. We cover each test in our guide to deducting interest on a family loan.

The lender’s side: reporting interest income

Interest you receive is taxable income, reported on your Form 1040, and on Schedule B when required (for example, when your total interest is over $1,500). If you sold the home and the buyer uses it as a personal residence, you must list the buyer’s name, address, and Social Security number on Schedule B and give the buyer your own tax ID; each failure can cost a $50 penalty.

So in a seller-financed deal, each side needs the other’s tax ID. Exchanging them feels awkward between relatives, so do it once, at closing, and keep them with the loan file. Many people use IRS Form W-9 to request a tax ID in writing.

Why the numbers often don’t match

The lender reports one interest figure and the borrower deducts another more often than you’d think. The usual causes:

• Splitting payments by guesswork. Every payment is part interest and part principal, and the split changes every month. Guessing, or using a generic online calculator with different assumptions, produces different totals.
• Late, missed, partial, or extra payments. Each one changes how much of the next payment is interest. A schedule printed at closing stops being accurate the first time real life happens.
• Different start dates and day counts. A first payment that covers 45 days, or a loan that starts mid-month, shifts the first year’s interest.
• Forgiven payments. If the lender waives a payment as a gift, that interest was never paid, so the borrower can’t deduct it, and the lender may have a gift to account for.

If the two returns disagree, neither one supports the other. That’s exactly what a tax examiner would look at first.

How to produce one matching number every January

1. Start from the note: the principal, the interest rate, the payment amount, and the first payment date.
2. Build the amortization schedule from those terms (not from a guess), so every payment splits correctly between interest and principal.
3. Record each payment when it happens: the date, the amount, and how it was paid. Bank transfers create a better record than cash or checks you don’t keep copies of.
4. Recalculate when something changes, such as a late or extra payment.
5. At year end, total the interest actually paid and give both parties the same written statement, ideally by January 31, the date banks send 1098s.
6. Each side files using that number: the borrower on Schedule A line 8b, the lender on Schedule B.

Common questions