Parent’s House – Son & Daughter Took Out the Loan – Lost Interest/Taxes???

[Gloria]

Is there anything that can be done in a situation where the son and daughter-in-law financed the home for the parents. The parents do not take the interest or tax deduction because the loan is not under their names (which is significant over--$25,000). The son & daughter-in-law would like to benefit from the interest and are wondering if they can treat the house as a rental (using the going rental rate). The parents give them a check monthly so that they can in turn pay the mortgage. I told them I did not think they could bout I would do some research. Also setting the rental issue aside—if in the future the house is sold by the parents, would the parents loose the $500,000 tax exception since the house is not under their names—assuming the son/daughter in-law cannot treat it as a rental..

I will appreciate you expertise. Thanks.

[jklcpa]

Your post is confusing. Whose name is the house in?

Did the children buy the house and the parents live in it?

[Gloria]

Your post is confusing. Whose name is the house in?

Did the children buy the house and the parents live in it?

The parents live in the house and the children are financing the house for the parents; therefore, the house is under the children's name.

[diligentbiz]

Forget the rental situation, even though parents pay kids each month. The house is owned by the kids, they get to claim the deductions because they are actually paying the mortgage. I have personal experience. Who got the money from the loan, parents or kids? This is the deciding factor of the risk.

[Gloria]

Forget the rental situation, even though parents pay kids each month. The house is owned by the kids, they get to claim the deductions because they are actually paying the mortgage. I have personal experience. Who got the money from the loan, parents or kids? This is the deciding factor of the risk.

When you ask, Who got the money from the loan? Are you asking, who financed the loan? If that is the case, the kids did and the house is under the kids names Maybe I should find out who came up with the downpayment (if a downpayment was made--with all those risky loans that were going on for a while!!!)--would that make a difference (the downpayment information)?. Please let me know what other information I should find out from the taxpayers. I am going to meet with them on Wednesday? Thanks for the input based on your experience.

[Lion EA]

Who's on the title or deed, the legal owner? Who's on the mortgage? Who actually pays the mortgage? Who pays the real estate taxes?

[mgmea]

>>Forget the rental situation, even though parents pay kids each month.<<

I would think long and hard before advising any one to overlook $25,000 of potential rental income on the children's tax return. It appears that the kids legally own the house and are the only ones on the mortgage and that the kids are writing out a check to the bank each month and are in return receiving a check from the parents? Advising anyone to overlook the check from the parents to the kids each month is a sure way to get yourself a $5000 preparer negligence penalty.

There are numerous court cases where the parents in this situation have been held to be "beneficial owners" and have been allowed to deduct the mortgage interest and real estate taxes. A problem for you might be that in most of these court cases the parents paid the mortgage directly to the bank as I recall. I would look into these numerous court cases regarding "beneficial owners" and go from there.

If you decide beneficial ownership doesn't fit, then you've got a classic case of a rental situation. If rent is FMV, then it goes on a Sch. E. If rent is not at FMV, then line 21 and Sch A for expenses.

In no case would I advise the kids taking the $25,000 deduction for interest and taxes and just forgeting about the $25,000 worth of checks from the parents. They can't have their cake and eat it too.

[Linda Mathey]

>>Forget the rental situation, even though parents pay kids each month.<<

I would think long and hard before advising any one to overlook $25,000 of potential rental income on the children's tax return. It appears that the kids legally own the house and are the only ones on the mortgage and that the kids are writing out a check to the bank each month and are in return receiving a check from the parents? Advising anyone to overlook the check from the parents to the kids each month is a sure way to get yourself a $5000 preparer negligence penalty.

There are numerous court cases where the parents in this situation have been held to be "beneficial owners" and have been allowed to deduct the mortgage interest and real estate taxes. A problem for you might be that in most of these court cases the parents paid the mortgage directly to the bank as I recall. I would look into these numerous court cases regarding "beneficial owners" and go from there.

If you decide beneficial ownership doesn't fit, then you've got a classic case of a rental situation. If rent is FMV, then it goes on a Sch. E. If rent is not at FMV, then line 21 and Sch A for expenses.

In no case would I advise the kids taking the $25,000 deduction for interest and taxes and just forgeting about the $25,000 worth of checks from the parents. They can't have their cake and eat it too.

To answer the other question regarding the exclusion available if the home is sold in the future. That also hinges on who really owns the home. If it is owned by the kids and not their primary residence then no one gets the exclusion. If the deduction for interest and taxes is $25,000 then the mortgage payments are probably much more than that amount . How about if the kids did a wrap around mortgage? I can't remember exactly how it worked but when we did it, it allowed children who were paying parents for the mortgage on their (kids) home to deduct the interest even though original loan was in parents names. Wish I could be more specific but it was quite a while ago.

[Gloria]

To answer the other question regarding the exclusion available if the home is sold in the future. That also hinges on who really owns the home. If it is owned by the kids and not their primary residence then no one gets the exclusion. If the deduction for interest and taxes is $25,000 then the mortgage payments are probably much more than that amount . How about if the kids did a wrap around mortgage? I can't remember exactly how it worked but when we did it, it allowed children who were paying parents for the mortgage on their (kids) home to deduct the interest even though original loan was in parents names. Wish I could be more specific but it was quite a while ago.

Thank you all -- for your time and advice -- I will be doing some research based on your answers. THANKS AGAIN.