Home Equity Line of Credit

[S T]

Parent obtains a HELOC on her primary residence and loans the money to her son from this loan. Son makes all of the HELOC payments directly to the Bank, but he is not on title on the House or the Loan.

Parent/taxpayer does not want to claim the interest on her tax return, but would like for the son to be able to claim interest paid on his tax return.

Wouldn't this just be a personal loan and neither the parent (since she is not making payments) nor the son can take the deduction?

Thanks,

Sandy

[BHoffman]

Too bad Mom can't just report it on her Sch A and write Son a check for the difference.

Can you report it on Son's Sch A line 11?

[Jesse]

I would agree with you. I can't see any way that the son could take it. Perhaps they should restructure so son pays Mom and Mom pays the bank for 2009.

[S T]

Restructure

Jesse, how would you restructure the loan to the son?

Sandy

[Jesse]

My thoughts were ................

Mom can't deduct the interest because she did not make the payments.

What if son repays Mom for the personal loan. Mom pays the bank for her home equity loan. Then she made the payments so she can take the deduction for the home equity interest, assuming no other disqualifying events such as AMT, not more than $100,000 or FMV of home, etc....

I'm probably missing something?

[veritas]

Of course she

didn't ask first did she?

What I see here is a loan from the mother to the son. The payments for the loan by the son includes interest which the mother should include in her income. She can treat the interest paid on the mortgage as home equity or investment interest.

This can have several bad tax ramifications for the mother.

As to the son, it depends what he did with the money. For example, If he put it into his business he could deduct it as business interest.


She probably will end up with a non-business bad debt in the long run.

Recently I heard the best advice for family loans. If you don't have it don't loan it. And if you have it don't loan it just give it.

[S T]

One more question

Thanks Veritas and Jesse,

My thought is that Mom loaned the money to son to pay off personal debt (verifying that now), so therefore the Son would not be able to deduct.

I would think that the best Mom could do would be an offset, since son is repaying the loan/interest amount which would be income to Mom, and then she deduct the HELOC interest on her return.

I agree with Veritas, this could be very bad form Mom\estate , either a non business bad debt, or an early gift against this son's inheritance.

Sandy

[Jesse]

How much was the loan for? Less than $10,000 could be considered a gift loan?

I'm trying Veritas!

[S T]

More

The loan was for $55,000. The parents home was free and clear with NO debt, and the Mom took out a HELOC loan and proceeds were given as a loan to her son.

Sorry, This is more than a gift. The son is making payments, not sure how timely, but he is making payments directly to the HELOC lender.

S

[BHoffman]

Can't the son report it on Sch A line 11? Can he satisfy interest tracing rules by proving he used her money as a downpayment on his house?

[S T]

It is Amazing

When you advise a client that the interest deduction might not be deductible, because they are not forthcoming with all of the facts.

Finally, the total HELOC is $100,000 which was all loaned by the parent (on her residence) to the son. The son used the funds for legal expenses incurred for his Trucking Business (I don't prepare the son's accounting or tax returns).

Thinking of the reporting, the parent will receive the 1098 form for the HELOC interest, however, the son is making the payments direct. Wouldn't the son have to issue a 1099 INT form to the parent, the son deducts on his Business return, the parent claims the interest on Schedule B as income and then deducts the interest on Schedule A?

The only problem I see with this scenario, is that the parent probably will not have enough deductions for schedule A to exceed the standard deduction, and then all of the interest that the son paid would be included as income on the parent return.

Any thoughts or suggestions.

Thanks

Sandy

[BHoffman]

Sandy - do you also prepare Sonny's tax returns - business and/or personal? Or is Mom your only client in this mess?

[S T]

My only Client

My only Client in this mess is MOM, the parent that went into debt for her Son. I have no accounting or tax relationship with the Son.

Sandy

[BHoffman]

Ok then, I remember a discussion about itemizing deductions:

http://www.thetaxbook.com/forums/showthread.php?t=9289&highlight=itemize

Can you just leave the 1098 HELOC interest off Mom's return entirely?

[Bucky]

Did they have a written loan agreement with son? One way you may be able to do this is write the loan to son up as interest free demand loan. As long as the imputed interest is less than the $12000 allowable gift per year your client would not have income to report. The son would not be able to write off the interest but he should be glad his parents helped him out. Just a thought.