Mother deeds Rental house to Daughter

[veritas]

Veritas
This would be great, however the daughter received the 1098 in her own name and ss#. This is the only problem .How do you handle this?

Again same problem.

I put the interest under unterest not on form 1098 and used the bank name , address and tin. That way I could transmit electronically.

[Black Bart]

Interest

Veritas
This would be great, however the daughter received the 1098 in her own name and ss#. This is the only problem .How do you handle this?

Well, you could try to get the mortgage company to change the 1098, but it's a lotta hassle for not much result. Or, you could report the actual amount of interest the daughter paid on line 12 of "E" (1098 interest), It'll be less than the 1098, but IRS won't squawk about it (they only do that when it's more than the 1098).

Mom's three months interest shouldn't be enough to interest IRS, so put her three month's worth on line 13 (other interest). Although that's not strictly and technically right, she did pay the interest and will still get it off even if she's unlucky enough to get audited for something else. IRS has no way to cross-check the origin of non-1098 interest, but interest doesn't have to be 1098 interest to be deductible.

[Brian EA]

Well, you could try to get the mortgage company to change the 1098, but it's a lotta hassle for not much result. Or, you could report the actual amount of interest the daughter paid on line 12 of "E" (1098 interest), It'll be less than the 1098, but IRS won't squawk about it (they only do that when it's more than the 1098).

Mom's three months interest shouldn't be enough to interest IRS, so put her three month's worth on line 13 (other interest). Although that's not strictly and technically right, she did pay the interest and will still get it off even if she's unlucky enough to get audited for something else. IRS has no way to cross-check the origin of non-1098 interest, but interest doesn't have to be 1098 interest to be deductible.

As a matter of fact, I do not have to even show the interest. The loss on the other rental will cover for it . Also no loss is deductible beacause their incomes ar too high. Over $15000

[Brian EA]

I just spoke to the mother. She said that she can have her daughter quit claim the property back to her in a few days.

What are some of the repercussions in a situation like this?

[Koss]

Brian,

I had a similar circumstance where my client who had bad credit needed to refinance in order to lower the monthly mortgage. He quit claimed the property to his mother who was able to obtain a favorable interest rate. Had they not done this the son would have lost the home.

I continued to treat the home as the son's and deducted the mortgage interest and taxes which he paid but was in his mother's name.

I did this based on something I read in The Other Book. TC Memo 1997-551

This is dicey, but it may be your best bet. The theoretical structure here is that the daughter became the lender when her mother had to refinance the loan on the property. This means that the daughter, acting as a lender, paid off the original mortgage. She may have obtained funds to do this by borrowing some money herself, but you want to hang on to the idea that the mother is still a borrower.

This is easier to do if there is a paper trail to support it, such as, well, if the mother is actually making the mortgage payments on the new loan.

This concept is supported by a Tax Court ruling documented in the the other book, in which a taxpayer couldn't get a loan because he had bad credit, so his brother became the borrower when when he wanted to buy a house. The taxpayer made the loan payments, but he wasn't the person who signed the mortgage note. The IRS said no deduction; the Tax Court said yes. But it was a classic "facts and circumstances" case. There was overwhelming evidence that there was a genuine agreement between the taxpayer and his brother that the payments he was making were building equity the house for the taxpayer, and not the brother, as well as an agreement that the deed would be transferred and the loan refinanced into the taxpayer's name when it became feasible.

If the IRS or the courts ever scrutinize your client's transaction, they are going to look at intent. Who is getting the rental income now? Who has the real risk of ownership, major repairs, deadbeat tenants, evictions, and all that baggage? Is the daughter really just a conduit for the lender? Or has she assumed the responsibilities of ownership?

They should have formed an LLC or a limited partnership or something. Hindsight is 20/20.

Perception is reality.

Interpretation #1: Mother says: I can't afford to own and manage this rental property anymore. The interest rate is too high. The rent isn't enough to pay the mortgage and maintain the property. I need to get rid of this thing. But I don't want to sell it and pay capital gains tax. I'm going to give it to my daughter. She'd get it when I'm gone anyway.

That's a gift. Daughter takes on Mom's basis. Meet Form 709.

Interpretation #2: I need to refinance this thing. The mortgage payments are killing me. I can't get a decent loan because my credit is shot. I'm transferring title to the property to my daughter so she can borrow against it. I have an agreement with her. I'll make the mortgage payments on the new loan, and I'll continue to receive the rental income.

Now you have the daughter acting as a lender. Maybe they can backdate a land contract or something. Have the daughter issue a 1098 to the mother. I've never heard of a "nominee" for a 1098, but the concept is very well defined when it comes to 1099-INT and 1099-DIV.

How far down the rabbit hole do you want to go?

Did they instruct the tenants to change how the rent checks are made out?

Okay, here's my "final answer."

If the intent of the transaction was not really to transfer ownership, but rather to facilitate more favorable financing, then the Rube Goldberg mechanisms we've been talking about are defensible. If the intent was really to give up ownership, control and benefit, then they have to report for what it was: a gift.

Ignore the form of the transaction, and look at the substance.

Burton

[Brian EA]

Thanks

Thanks to all you wonderful folks out there. I completed the return last night.The mother kept the rental property. Her daughter will quit claim the property to her sometime this week. The daughter will add the mom to the mortgage .

Again, thanks very much