ownership/mortgage mess

[EllieB]

Help need advice on mortgage/ownership situation
As we all know, getting a mortgage loan approved these days is a horrendous process. I have a client with the following situation.
Father and son bought a house with son providing down payment and intending to live in house. Father was to cosign loan because son's credit rating was a little shaky (divorce , job change, etc). Lender refused to make loan unless father was only borrower and treated house as investment property. So now father is on loan, son provided 20% down, and both names are on the title. Son wants to arrange to make payments on mortgage directly to lender; don't know if this is possible since he is not named on loan.
Question is how to report this on 2011 taxes. Father is in 25-28% bracket, son is much lower. As I see the options, they are:
1 Father treats house as rental property, takes all deductions, makes payments himself but lowers sons rent by amount he saves on taxes
2. Father takes 80% of interest and taxes as itemized, son takes 20%
3. Other choices?

What am I missing here or forgetting to warn them about?

Thanks for any help

[erchess]

My take

Renting may be more trouble than it's worth. First of all, it's critical that son actually make rental payments to Dad preferably by check. Also you would have to have evidence that the rental rate is what the house would rent at to a stranger or if that's not the case then Dad is renting not for profit which limits his deductions. Besides, you're transferring taxable income from the lower taxed member of the extended family to the higher taxed member. Why would they wish to do that?

I also think the two can divide the mortgage interest in any way they mutually agree. It seems to me that Dad needs it more so why not let him take it all?

[joanmcq]

If dad isn't paying, dad can't take the deduction.

this seems like the classic 'equitable ownership' situation. Son should be able to take the deduction under equitable ownership, since the only reason he is not on the mortgage is that the son had bad credit. See Uslu v. Commissioner. TC Memo 1997-551

[JohnH]

They could open a joint checking account and pay the mortgage payment out of that account by check or draft. Then they could deduct the interest and taxes proportionally, based on how much each of them pays into the joint account.

[Jesse]

Thinking out loud - Father renting to son doesn't sit right with me because It sounds like the son is indeed the beneficial owner of the home.

As Joan pointed out this situation sounds similar to Uslu, T.C. Memo 1997-551 refer to TTB page 4-11.

[EllieB]

Thank you!

Thank you all for your help. Uslu sounds like just the case I have here, and will be the simplest way to handle things. Son will live in house, make mortgage payment and deduct any expenses. Simplicity is worth money here. Will also advise filing quitclaim to put son on title as soon as possible. Since he made the down payment, I see no problem there.
Thanks again

EllieB

[JohnH]

You've started a thread about something I've been meaning to explore anyhow. I'm wondering if a "Contract for Deed" (or "Land Contract", or whatever the equivalent is in other states), would help solidfy the position that the person living in the house is legally obligated to make the payments. I am referring to an agreement which would be duly recorded with the register of deeds, etc. and part of the public record.

[Nashville]

Son Makes Payments

Once the loan is set up, the bank won't care who writes the check. JoanMcq could do it and they wouldn't care.

I would deduct the interest if I were the son. Ridiculous to disallow him the interest as long as he's making the payments. I would also keep the notification in writing that his loan was not approved as the primary lender.

Only problem I see forthcoming is Dad will get the 1098. A 1099- can be bailed out on a nominee statement, but not sure about a 1098. Maybe someone knows the answer to this.

[erchess]

Mortgage

In my first comment to this thread I completely agreed that the son can claim the mortgage interest and he will have no problems on that score if he should be audited.

I missed in OP the fact that son is paying the entire mortgage. Of course Dad cannot claim what he did not pay. Furthermore I must have had a screw loose thinking Dad could claim more than he paid just because the son was willing to let him. I believe that there is a nominee 1098 that Dad should issue to the son.

I've not yet had this come up in my work but I would think we will see it more often in the future.

[joanmcq]

I would attach a statement to the return, interest reported under Joe Smith, SSN: xxx-xx-xxxx. I do this for my same-sex couples where the one paying and deducting the mortgage is not the one on the 1098.

[EllieB]

any more info needed?

The statement you mentioned sounds like a good fit for my clients situation. Do you ever include more info - such as ownership - or does the IRS seen satisfied if they can link the1098 to another return and see that there is no double deduction? And do you list the mortgage interest deduction on line 10 or line 11 of schedule A?

Thanks again

[Burke]

You can report mortgage interest you paid, for which you did not receive a 1098, on Line 11 of Schedule A. This has not been a problem in the past in my experience.

[Gary2]

In addition to reporting it on line 11, attach a statement giving the name and address of the person who received the 1098 (as per the Sch. A instructions).