Legal Question in Real Estate Law in California

Re: Loan interest

I see two pretty obvious problems with this loan deal as described.

First, a 12% interest rate is probably usurious. There are exceptions to the usury laws for certain lenders (banks, brokers, etc.) but a private loan that is not seller financing probably doesn't qualify. There are serious penalties for usury, including forfeiture of three times the interest collected, or it can be charged as a criminal offense (a misdemeanor) although this very rarely happens.

The second problem is with how one secures a loan with a grant deed. The more usual security is a deed of trust with power of sale. I suppose a grant deed could be used by having a third person hold it in escrow pending pay-off of the loan.

I think the tax deductibility of the interest, including the portion that was usurious, would be permissible IF there was a valid pledge of the home as collateral. The only way to know for sure is to show the documents to a real estate lawyer who is also at least somewhat knowledgeable in the area of income taxation.

A reliable answer would require looking at the supposed security instrument - grant deed or whatever - and asking follow-up questions such as whether it was held by a third party or delivered to the grantee, whether it was recorded, the timing, etc.