Dear Bootsy,
Don't worry. This is a piece of cake.
Of course it makes sense to do anything you can to
get the lowest interest rate.
Not a problem.
Here are the basics:
To deduct the mortgage interest as personal residence interest:
1) You or your spouse need to be on title
2) You must also be named on the loan (i.e. you must be
responsible for the loan).
3) You need to be living there.
4) You need to make the payments.
So, if you meet all the qualifications, take the deduction.
Don't let your parents make any payments, even if they are
on the loan. If you're short of funds, have them lend you
the money - and you write the check.
Hooold on there...you have no current income?
You don't need the deductions.
Tell you what. Work this out with your parents.
If they have income and you don't, perhaps they
can treat this as a vacation home.
If so, let them make the payments.
I know you're going to have a couple more questions
about this. So, please, go ahead and ask.
Best wishes
Your TaxMama-ga |
Request for Answer Clarification by
bootsy-ga
on
16 Sep 2003 21:55 PDT
Thanks for the attempt at the answer, but it's not quite enough. I
need tax authority for what you say.
Basically - here is the question -
If my parents purchase an apartment as a second home, how can I
structure it so that I can take the mortgage interest deductions.
Further, I want to avoid them having a taxable gift.
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Clarification of Answer by
taxmama-ga
on
16 Sep 2003 22:39 PDT
Hi Bootsy,
I thought you had no income, so you didn't need the deduction.
OK, you want to be able to take the deduction.
Include yourself on the title AND on the loan.
If you cannot be on the loan, for whatever reason,
write up a separate mortgage note between you and your
parents after escrow closes.
You'll be living in the house. So, if you make the payments,
you'll be able to take the deductions.
Here is the link to the section in IRS Publication 936
that defines who may take a mortgage interest deduction:
http://www.irs.gov/formspubs/page/0,,id%3D103242,00.html#T2
To look up the rules about mortgage interest in the tax code,
go to the House of Representatives online tax code link:
http://uscode.house.gov/usc.htm
Enter "interest" or "mortage" into the "search words" field
and enter "163" into the "section" field. (Do not use the
quotation marks. They are for your benefit.)
Once you get to the page, you are looking for Internal Revenue Code
Section 163(h)(3) for the definition of what "personal residence interest"
is deductible. You'll need to scroll way down on the page.
If you're going to take the deduction, you don't really care if it's
your parents' second home. You only want to establish that for the
lender, so they will treat it as a personal residence loan, not a
commercial loan.
You only want it to be a second home for your parents, for tax purposes,
if they are going to be making the payments. If you are, then, it doesn't
matter.
About the information about preparing a mortgage note between you and your
parents, you won't find that in the code. That's a solution the tax
professional community uses to make this situation work. IRS will accept
that.
If this doesn't give you what you need, please, be specific and tell me
exactly what you want to accomplish - not all the options, just - where
do you want to end up? What, exactly, are you trying to achieve?
Thanks
Your TaxMama-ga
|
Request for Answer Clarification by
bootsy-ga
on
18 Sep 2003 16:38 PDT
Hi Taxmama - I thank you for your patience, and will tip well when
this is through. Hopefully we're nearing the end.
Let me tell you exactly what is going to happen.
The mortgage will be in JUST my parents name. They will make the
downpayment (because a check cannot go to the bank in my name) AND the
first year or so of payments. After that time, I will take over all
payments, and repay them for all of their investment.
1) Cleary - they can take deductions for whatever payments they make.
No issue there.
2) The issue I am trying to solve: I want to be able to take the
deductions when I pick up the payments, even though I'm not on the
loan. Presumably, it will not make sense to have me change the loan
to my name (because interest rates will be higher in a year). I think
what I've learned is that I'll just itemize the deduction, even though
I won't have a form from the mortgage company saying how much interest
was paid. My parents, and I, will each have to refer to each other's
tax returns every year so that I get the appropriate deductions. Does
this sound accurate to you?
The issue is, I am not legally liable for the loan. My
understanding is, generally you can't take an interest deduction
unless they are the "legal, equitable, or beneficial owner". So I
will not be the legal owner (b/c I will not be on the deed. I
believe, your suggestion of a mortgage note was basically the
suggestion that I would be the "equitable owner." Can you verify that
is your opinion?
This appears to be the main issue - how to get us (my wife and I) to
qualify for deductions once we take them over). Presumably, you're
just saying: document, document, document, maybe notarize the
relationship. Indicate that they have no ownership or rights of sale,
etc. Can you think of any other ways to get us to be the "equitable
or beneficial owners."
Do you have any examples of the mortgage note you are referring to?
3) Gift tax stuff - I think this is easier. We basically want to
avoid any payments they make as being gifts. We'll just have to track
that we have paid them back all of the appropriate amounts, or that
the gift amount in any given year is less than $11,000.
Thank you very much.
|
Clarification of Answer by
taxmama-ga
on
18 Sep 2003 19:43 PDT
Hi Bootsy,
Good. Now I know what you're trying to do.
OK. Your parents have no problem taking the mortgage
deduction for the first year on their second home.
And, no doubt, they'll be there a great deal.
When you want to start paying them, prepare a grant deed
to transfer the title in the property to you and your
spouse, as well as them. (As long as they are responsible
for the mortgage, they should also be on title.)
Ask your attorney whether the title should be held
as tenants in commmon or as joint tenancy.
(I always get it mixed up which is better for inheriting.)
FATCOLA has lots of nifty free forms for you:
http://www.fatcola.com/inside/blank_docs.cfm
Grant Deed
http://www.fatcola.com/FatcolaDownloads/Articles/BlankDocs/Grant_Deed.doc
Here's a loan document you can use - Installment note
http://www.fatcola.com/FatcolaDownloads/Articles/BlankDocs/Installment_Note__Interest_Included_.doc
You're totally right - document, document, document.
Make sure all this is totally legit.
You can put a line in the installment agreement, something like:
Lender requires that borrower makes all payments to a third pary,
INSERT NAME OF MORTGAGE COMPANY, on their behalf.
(Have an attorney help you with the wording.)
THEN, you can go ahead and make the payments directly to the lender.
In fact, you could change the mailing address of the monthly
statements
to your address.
You could take the mortgage deduction.
Technically, your parents should pick up the interest you pay in
income.
They could deduct the interest as an investment interest expense.
The net effect should be -0-.
Aha! Here is the case I wanted to find for you.
Follow this link. Print it out. Keep it in your permanent file,
with the purchase escrow documents:
In Uslu v. Commissioner, [Tax Court Memo 1997-551 (December 16,
1997)],
http://www.nysscpa.org/cpajournal/1998/0898/Departments/D60898.htm
As to the gift tax issue - no problem.
You have nothing to worry about.
EACH of your parents, may give you and your spouse
$11,000 per year.
That means 2 parents x $11,000 X 2 spouses = $44,000.
http://www.bottomlinesecrets.com/blpnet/article.html?article_id=31349
Your mortgage is much lower than that. So, your parents
are free to help the two of you out.
Now that I know what we're doing, I feel better.
Please free to about anything that needs to be clarified.
Best wishes,
Your TaxMama-ga
P.S. I found the case using this Google search:
mortgage, IRS, parents, title beneficial
|
Request for Answer Clarification by
bootsy-ga
on
19 Sep 2003 08:10 PDT
Just wanted to say thanks taxmama! Really great answer, you were a
pleasure to work with and I hope the "tip" was sufficient and fair in
your eyes.
Cheers!
|
Clarification of Answer by
taxmama-ga
on
19 Sep 2003 08:30 PDT
Hi Bootsy
Thank you very much.
I've really been wanting to find that citation for you,
but some of the legal research sites are bit clunky.
It was a real surprise when it popped up in Google search.
Good luck. Hope you love your new home.
Best wishes,
TaxMama-ga
(yes, 'she')
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