Unfortunately, this would be considered a "gift" from you to your sister. The IRS is pretty strict when it comes to family arrangements, whereby one family member pays things for another family member.

Even though you are paying, the IRS will assume that favors done for family members are gifts.

There is a limit, after which you have to pay gift taxes. It's $11,000 per year.

The IRS would not know about this private arrangement you have for paying your sister's mortgage, however.

If you want to claim a deduction on your income taxes, you would have to be the one on the mortgage, not her.

However, since you are in a trusting situation with your sister, maybe you could work it so that she gets the deduction and then shares any refund she gets with you.

Remember that strictly speaking, the IRS could charge you gift taxes for the annual amount in excess of $11,000 that you pay to help out your sister (if they really audit, which perhaps they never will).

$13,000 per person is the annual federal gift exclusion for 2010 and 2011.

The person who can claim the deduction for mortgage interest is the one who legally owes the debt on a first or second home, and actually paid the mortgage. So in the situation where a generous brother pays the mortgage on his sister's house, of which he doesn't have any financial obligation, nobody gets to write off the interest.

If it would help your sister out on her tax return, you could give her the money and let her write the mortgage check. Then she would be paying the mortgage and could deduct the interest.