Tax Question re: Mortgage/Interest

[LadyyRedd]

A friend of mine owns 2 homes. One is the place she lives and the other, she purchased in her name for her mom (who couldn't get the loan in her name), but her mom pays the mortgage. Friend doesn't "make any money" on it, her Mom is just paying the mortgage flat out until a point in time when Mom can get the loan in her name and Friend will sell the place to Mom. But everything regarding mortgage is strictly in Friend's name, only utilities/cable/phone are in Mom's name.

Friend wants to know if she can claim the mortgage interest on her taxes like she does with her own primary residence. She's getting conflicting info. Anyone know for sure?

Kimya

 

[Servants of Evan]

I'm virtually certain the answer is No. She doesn't use this as a residence and as she is only passing along the true cost of the mortgage to her mother it's not an investment (business) either. If however she was making a profit (charging mom more than what she's charged by the bank) the answer may well be different. The flip side is the paperwork headaches would be huge...

 

[DVC Sadie]

I would post this question on the budget board. There seems to be several tax accountants that hang out over there.

 

[AnaheimGirl]

She's not paying the interest, so she cannot deduct it.

 

[brerrabbit]

Its a very interesting situation that can be handled a couple of ways. In effect what she is doing is buying the house and leasing it to her mother. The monthly rent being charged is the mortgage payment. The interest paid will be reported to the IRS in the ladies name who got the mortgage regrdless of who actually pays it. Therefore her mother can get no tax deduction for the interest payments. The net tax effect to the daughter is zero because her costs, payments to the mortgage company are exactly what her mother pays. However there is a tax benifit to the daughter if she files it as a rental property because she can deduct depreciation on the house as a rental property. Additionally any expenses involved with the house that a landlord would pay could be written off as expenses. The downside is that if you go this route then the price the mother pays when she eventually gets her own mortgage and buys the house from the daughter vs what the depreciated value is will be treated as a taxable capital gain to the daughter. This is one of those situations where it would be definitely worth seeking the advice of a tax professional.

 

[Galahad]

Technically, she has a second home that she is not renting out (her Mom is simply writing the checks - unless she has a written lease or other agreement). Therefore, she technically could deduct the interest as you are allowed to do so on a second home as long as you don't make money on it. You don't have to live in that home. IRS publication 936 spells it out. Not sure it's the "right" thing to do since her Mom is really paying the interest. But I think the deduction is legally available to her.

 

[AnaheimGirl]

Just wanted to add now that I have more time... the form 1098 will have your friends social security number on it, so the IRS will "match" that interest deduction to your friends return. Meaning she "could" deduct it and likely never be questioned unless audited. But, there is also a requirement that expenses actually be paid or incurred by the person deducting them. You cannot just deduct something someone else is paying.

She can rightfully deduct the mortgage interest if she includes the payments her mom makes in her income as rental income, as brerrabbit said. There are limitations on the deduction of losses from rental properties, so going this route is a lot of effort for little or no return, when it'd be much simpler to just leave it off of the return.

We often ran into situations like this when I worked as a CPA. If one person was receiving income or paying an expense that was reported under another person's ID#, we'd show the income/expense on the first person's return with the notation "reported under SS#XXX-XX-XXXX". Then on the other person's return, we'd show the income/expense as reported on one line, then on the line below it show the amount again as a negative, described as "amount reported by SS#YYY-YY-YYYY". This way the IRS can match it up and the deductions go to the people who actually incurred them.

Honestly, I think this is the kind of thing where tax professionals will disagree. I know many who wouldn't look past the number on the 1098, but obviously, I disagree with that. She certainly should talk to a tax professional, and get a good understanding of what she's doing and why.