Third House

[Gary2]

I see no problem with allowing his grandson to live there rent free. That just makes it into personal-use property.

[dan doshan]

I tend to agree with Peggy and Lion. See no reason he can't deduct the mortgage interest on the home on Sch. A.

[FEDUKE404]

Two home limit

I tend to agree with Peggy and Lion. See no reason he can't deduct the mortgage interest on the home on Sch. A.

From IRS Pub 936:

Qualified Home
For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. This means your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.

The interest you pay on a mortgage on a home other than your main or second home may be deductible if the proceeds of the loan were used for business, investment, or other deductible purposes. Otherwise, it is considered personal interest and is not deductible.

FE

[joanmcq]

His main home is the one he lives in. His second home can be either the vacation home or the home his grandson lives in. Since there is no mortgage on the vacation home, I'd pick the grandson home.

Both are personal property. In fact, for really rich people who have several homes, all of which they live in, can swap homes in and out depending on which two give the best tax benefit due to the mortgage interest limitations.

[RLymanC]

Gift to Grandson

$13,000 and charge rent

[Gary2]

$13,000 and charge rent

Why make things complicated?

[FEDUKE404]

Second residence issues

His main home is the one he lives in. His second home can be either the vacation home or the home his grandson lives in. Since there is no mortgage on the vacation home, I'd pick the grandson home.

Both are personal property. In fact, for really rich people who have several homes, all of which they live in, can swap homes in and out depending on which two give the best tax benefit due to the mortgage interest limitations.

I'm far from being an attorney (thank goodness!) but I think the definition of qualified residence, thus enabling deduction of mortgage interest, might get in the way.

The tax law defines "qualified residence interest" as interest paid or accrued during the tax year on “acquisition indebtedness” or “home equity indebtedness” secured by a taxpayer's qualified residence. A "qualified residence" is the taxpayer's principal residence and one other residence selected and used by the taxpayer as a residence.

Since we are still not quite clear on what owner/grandson are really doing, perhaps to tilt the "used as residence" restriction, it is still a question to ponder. But a reasonable person might conclude house #3 could not be both a "personal residence" and an "investment property."

Also: Is this guy trying to work around some estate/inheritance issues perhaps?? Or does he just not like paying taxes each year...maybe even as a result of poor tax planning (estimates/withholding)??

Personally, I would have just upped my withholding from my pension(s) and had the Soc Sec folks take out some federal withholding also. The fact that 85% of his Social Security benefits face federal taxation should not have been, in any way, a surprise.

Hope this guy does not have any "overlooked" RMDs rattling around out there....

FE

[Gary2]

The tax law defines "qualified residence interest" as interest paid or accrued during the tax year on “acquisition indebtedness” or “home equity indebtedness” secured by a taxpayer's qualified residence. A "qualified residence" is the taxpayer's principal residence and one other residence selected and used by the taxpayer as a residence.

Pub 936 says that if you do not hold it out for rent or resale to others, you can treat it as a qualified home. You don't have to actually use it.

[Lion]

Family

Letting family or even friends use it for free, is personal use.

[Roland Slugg]

The third is a house he bought as [a] tax write off.

I bill clients who love tax write-offs $25,000 to prepare their tax returns.

Then we're both happy!

[whkrueg]

Third House

Thanks all for the input.

I am leaning toward the Schedule A. But, will have wait to see what his 2010 return says.

I agree that the best solution for him is to increase his withholding from his pension and possibly have tax withheld from his Social Security. Had I done his original return that is what I would have told him to do.

In reading over TTB I came across Types of Rental Income called "Property of Services" which is the "FMV of property or services in lieu of rent". According to the footnote, if we said his grandson took care of the place as a caretaker and he allowed him to live there rent free for doing that. Let's say the FMV for that service would be $500 a month. Then we could report that as rental income. We could use schedule E and then claim depreciation and reduce his tax burden even more. As it stands now. If we go the Schedule A way, he will still owe the IRS quite a bit of money.

What do you think?

Thanks/Wayne

[RitaB]

Couple a things

I am leaning toward the Schedule A. But, will have wait to see what his 2010 return says...


In reading over TTB I came across Types of Rental Income called "Property of Services" which is the "FMV of property or services in lieu of rent". According to the footnote, if we said his grandson took care of the place as a caretaker and he allowed him to live there rent free for doing that. Let's say the FMV for that service would be $500 a month. Then we could report that as rental income. We could use schedule E and then claim depreciation and reduce his tax burden even more. As it stands now. If we go the Schedule A way, he will still owe the IRS quite a bit of money.

What do you think?

Thanks/Wayne

1) The 2010 return may be wrong.

2) You would be increasing income $6000, then writing off depreciation in the amount of what? Then, when he sells this thing, his basis is less by that depreciation expense.

Doubt seriously that grandchild is doing any upkeep. I would not get creative on this. We live in America. Half of us pay taxes.

[Gretel]

1) The 2010 return may be wrong.

2) You would be increasing income $6000, then writing off depreciation in the amount of what?

If this is legitimate (which I don't think it is) he also would have $6000 in expenses for maintenance.

[RitaB]

Oh, duh

If this is legitimate (which I don't think it is) he also would have $6000 in expenses for maintenance.

Yes, my bad.

[whkrueg]

Third House

The client showed up this morning, without a copy of his 2010 return. All he had was his receipts from the Tax Preparer who did his return last year. I could see from the receipt that a Schedule E was included in the return.

I told him to go back and request a copy of his 2010. That I needed to see it and couldn't do his 2011 return without it. He is not a happy about it but he is going to go it.

The Saga continues.....

Wayne