How do I record this transaction?

I used my $5000 stock portfolio as collateral for a $20000 5yr 5.25% amortized loan, which I used as a down payment on a $100,000 15yr 5.25% mortgage. I used that mortgage to pay off my friend's 30yr
mortgage, and he transfered the title to me, so now I have house w/ a market value of $450,000. I rent it out to him for $1800/month, with an option to buy at 80% of the appraised value after 10 years. How do I record this on my books? Do I record the MV of the house as an asset?
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Interest on this loan is not qualified mortgage interest and can not be deducted as such.

It was a down payment on a purchase - which was primarily financed by a mortgage.

So - did you buy the house, and is the $100k mortgage you have secured by the property?

Irrelevent.
What did you buy the house for? What was the final sales price? Seems like it's maybe $120,000. The $20K down and the $100k loan. That's the amount of your asset.
The house/property is rental property. You depreciate that over time
You report teh rental income received and get to deduct the rental expenses, mortgage interest, property taxes, insurance, repairs, etc and so on. Plus the depreciation, but not the principal amount of your loan repayments.

No.
--
Paul A. Thomas, CPA
Athens, Georgia
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How did you get a $20,000 loan secured by a $5,000 portfolio?
Is the mortgage secured by the house?
If your friend transferred title, then it appears you own the house today and he sold it to you for a value far below market value OR, the friend is in effect carrying back a mortgage. You say you have an option to buy the house in 10 years, so you actually have a purchase with an unspecified price at the outset. If you're using it as a rental property, you'll need to compute depreciation on some amount so the present purchase price s/b established subject to modification in 10 years. If you decide to forego taking depreciation on the rental property because it's easier, you're in for a nasty back-end surprise when you sell the property. Also, as you're friend is in effect carrying the mortgage, you'll need to impute interest on that mortgage even if no interest or principal paymnets are made and your friend will have to take that amount of imputed interest into income.
You describe a transaction that you probably need professional help (both legal and accounting) to help you account for to protect both parties and ensure all property tax reporting is done.
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