Co-signing a mortgage is a generous gesture—one that can make the dream of homeownership possible for a family member, friend, or partner who might not qualify on their own. But like most financial decisions, co-signing carries both benefits and responsibilities. Beyond the credit risk and potential legal obligations, it’s important to understand the tax implications of co-signing a mortgage—a subject often overlooked until tax season rolls around.
This guide covers what it means to co-sign, how it can affect your taxes, and whether you can claim a mortgage interest deduction as a co-signer. We’ll also walk through a real-world case study and clarify common misconceptions, so you can move forward with confidence.
What Does It Mean to Co-Sign a Mortgage?
When you co-sign a mortgage, you’re legally agreeing to be responsible for the loan if the primary borrower fails to make payments. You don’t usually have ownership of the property, nor do you make monthly payments (unless the borrower defaults). But in the eyes of the lender—and credit bureaus—you’re fully liable.
Your name appears on the loan but not on the title. This distinction is crucial when it comes to tax rules for mortgage co-signers.
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How Co-Signing Affects Your Credit and Financial Responsibility
From a lender’s perspective, your credit and income are backing the loan. The mortgage will appear on your credit report and factor into your debt-to-income (DTI) ratio. This could impact your ability to borrow for other purposes (like buying your own home or financing a car), even if you’re not making the payments.
If the borrower is responsible and makes on-time payments, your credit may benefit. But if they miss payments or default, your credit score will suffer—and you could be on the hook for repayment.
Co-Signer Tax Liability: What the IRS Says
Here’s where it gets interesting. The IRS focuses on who actually pays the mortgage—not just who is listed on the loan. If you’re a co-signer who doesn’t contribute to the monthly payments, you likely won’t qualify for mortgage interest deductions—even though the loan appears on your credit report.
According to IRS Publication 936:
“You must be legally liable for the mortgage, and you must actually make the payments, to deduct mortgage interest.”
So while you’re legally responsible as a co-signer, you can’t claim the mortgage interest deduction unless you’re also contributing financially.
Mortgage Interest Deduction Co-Signer Rules
The mortgage interest deduction allows eligible homeowners to deduct interest paid on mortgages up to $750,000 (or $1 million if grandfathered under prior law). But for co-signers, the rules are more nuanced.
You may qualify for a deduction if:
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You are legally liable for the loan, and
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You actually paid some or all of the mortgage interest
If you only co-signed and didn’t pay, you can’t deduct anything. If you paid part of the interest, you can deduct only the portion you paid—provided you itemize deductions.
Example:
You co-signed a mortgage with your daughter. She paid $15,000 in interest over the year. You made a few payments totaling $3,000 when she was short. You may be able to deduct $3,000 in mortgage interest, assuming you meet all other IRS requirements.
Can Multiple People Claim Mortgage Interest?
Only those who meet the IRS’s criteria (legal liability + payment made) can claim interest. If two people split the payments, each can deduct their share.
It’s important that all co-payers keep records, including bank statements or canceled checks. You’ll also need to agree on how to split the Form 1098, which typically goes to the primary borrower.
Tip: Communicate with the borrower and consider filing IRS Form 1040 with a statement detailing your contribution if you’re deducting interest.
Real-World Case Study: Co-Signing for a First-Time Homebuyer
Background:
Michael, a father of three, co-signed a mortgage for his son Josh, a first-time homebuyer with limited credit history. Josh’s income was sufficient for monthly payments, but his credit score wasn’t high enough to qualify for the loan alone.
Tax Season Surprise:
Josh paid the full mortgage amount, including $12,000 in mortgage interest. He received Form 1098 from the lender and claimed the entire deduction.
Michael, although a co-signer, didn’t pay anything. But thinking he could deduct his share as a co-signer, he also attempted to claim half the interest on his return.
Result:
The IRS flagged the duplication. After an audit, Michael had to amend his return and repay part of his refund.
Takeaway:
Even though Michael was legally tied to the mortgage, he had no tax benefit because he didn’t actually make payments. This highlights the importance of understanding the co-signer tax implications before filing.
What Happens if the Co-Signer Starts Making Payments?
If you begin making payments as a co-signer—whether due to financial hardship of the borrower or another arrangement—you may then qualify to deduct the mortgage interest on the portion you pay.
Let’s say the borrower lost their job, and you, the co-signer, paid six months of the mortgage. You could deduct the interest paid during those six months, assuming you’re also liable on the mortgage and itemize deductions.
Additional Tax Considerations for Co-Signers
1. Gift Tax Rules
If you make a mortgage payment on someone else’s behalf, it could be considered a gift by the IRS. You can gift up to $18,000 per person per year (2025 limit) without triggering gift tax implications. Paying more than this could require you to file a gift tax return (Form 709), although you may not owe tax due to the lifetime exemption.
2. Impact on Loan Forgiveness
If the borrower defaults and you repay the debt, you can’t deduct the full balance unless it meets IRS rules for bad debt. Always consult a tax advisor before claiming losses on a co-signed loan.
3. Rental Properties
If the mortgage is for an investment or rental property, co-signers may qualify for additional deductions—but only if they are listed as owners and actively participate in the investment.
Best Practices for Co-Signers
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Get Everything in Writing – Clarify payment responsibilities and tax treatment in a written agreement with the borrower.
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Keep Records – Document any payments you make, and retain copies of checks or bank transfers.
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Coordinate Tax Filing – Communicate with the primary borrower during tax season to avoid duplicate deductions or IRS flags.
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Consult a Tax Professional – Especially if payments are shared or if you’re unsure about your rights and responsibilities.
Final Thoughts: Co-Signing a Mortgage Carries Financial and Tax Risks
While co-signing a mortgage can be a helpful and generous move, it’s essential to understand the tax implications of co-signing a mortgage before agreeing to the commitment. The primary takeaway? You don’t get tax benefits unless you pay the bill.
Only co-signers who both pay the mortgage and are legally liable for the loan may be eligible for the mortgage interest deduction—and only on the portion they actually paid. Always maintain clear records and communicate with the borrower to avoid mistakes that could raise red flags with the IRS.
References:
Internal Revenue Service (IRS). (2023). Publication 936: Home mortgage interest deduction. U.S. Department of the Treasury.
RefiGuide. (2023). Are Home Equity Loans Tax Deductible?
Consumer Financial Protection Bureau (CFPB). (2023). What does it mean to co-sign a loan?
Experian. (2023). What are the risks of co-signing a mortgage loan?
