Did I handle this wrong?

[Safire]

Lady is separated from husband, buys house, but puts house in Dad's name so the estranged husband can't bother it once divorce is done.

She wanted to take the mortgage interest, I told her that the only way was to say she paid it to her Dad, and list him and his social security number on her Schedul A.

I explained to her, that her Dad would have to show that as interest income on his return and she said she talked to him and that it was ok.

Now, she calls and Dad is getting his reutrn done and she wanted to know what it was I told her he needed to do again.

Did I screw this one up?

[Armando Beaujolais]

Lady is separated from husband, buys house, but puts house in Dad's name so the estranged husband can't bother it once divorce is done.

She wanted to take the mortgage interest, I told her that the only way was to say she paid it to her Dad, and list him and his social security number on her Schedul A.

I explained to her, that her Dad would have to show that as interest income on his return and she said she talked to him and that it was ok.

Now, she calls and Dad is getting his reutrn done and she wanted to know what it was I told her he needed to do again.

Did I screw this one up?

There are lots of unanswered questions here.

You can't deduct interest unless you're legally liable for the loan.

You can't claim home mortgage interest unless the mortgage is secured by your home. If it's the dad's home, any payments the Lady makes are gifts to the dad, or maybe rent.

Is it a case where in reality the dad bought the house and is liable for the mortgage, and just lets the daughter stay there? If so, there's no mortgage interest and property tax deduction for the Lady because she doesn't own the home and is not liable on the loan.

If the Lady is making mortgage payments for the Dad on the Dad's house, it looks like you've got a rental going on. And if less than FMV, rental income taxable, no expenses allowed.

Just a worst case scenario. I hope it's not like that.

[Safire]

No, it really is a case of it's her house, but Dad's name is on mortgage. She is not liable for the loan to the bank, but she actually makes the mortgage payments.

I was thinking it could be handled as an installment sale from Dad to her, but then I am leaving out all implications to her Dad's return, mainly gain on the sale and where he would be able to take off the interest that is coming to him as interest income.

Thanks for your imput, if the installment sale angle won't work, I need to give her a call back before Dad gets his return done.

[Safire]

Come on I can take it, I already have a bad feeling about this one. As in I screwed up, but how bad did I screw up?

Will the installment sale theory work?

Dad buys house, Dad resells house to daughter at no gain, no loss, only interest income?

[Bees Knees]

Did Dad really buy the house? What did he pay for it?

Transfering real estate to a relative where no money is exchanged is called a GIFT. If she transfered the house to her Dad to keep the ex from getting anything, then she gifted the house to her Dad. You can't call it an installment sale, unless she is paying him to buy it back, which she doesn't want to do, otherwise, the house would be in her name and not her Dad's name. Any payments to the mortgage company that she makes are non-deductible since she doesn't own the house. If Dad were liable for the mortgage payments, then she could pay him rent for living their and he could turn around and make the mortgage payments with the rent money and deduct that.

Otherwise, you have a bunch of non-taxable non-deductible gifting going on. That is the price you pay for trying to cheat your ex out of his half...

[Safire]

Thanks for the response Bees.

I don't think it was like that, her trying to cheat him out of anything. They have been separated 2 years, and she just bought the house last year. I think it's more of a her,trying to not let him have half of what she is working toward now, than what they had when they were together. Of course, I have only heard one side of the story.

From what I understand, she paid the down payment, she has made all the payments to the bank. She just couldn't put it in her name because he is giving her a hard time about the divorce. Dad was willing to help out any way he could.

I hate this. I will pay penalties and interest because I felt sorry for a client. I should have just told her she was screwed.

[Bees Knees]

My previous response is what the IRS would say if this case were audited with a fine tooth comb. I don’t know that the IRS would ever find out who’s name is actually on the title. If her name is on the mortgage because she is paying the bank, and the bank issues a 1098 to her for the interest she paid, I would tend to give her a pass and let her deduct the interest.

There is a court case that could be twisted into working for your client. Read TTB, page 4-11, second column under legal liability. The correct answer is she does not get to deduct interest if her name is not on the title. But the tax court in Uslu (December 1997) gave the taxpayer a pass under a particular set of circumstances that could be argued to be similar to your case.

[Safire]

Thanks for that reference, I will look it up for sure.


Ahhhhh, yes this might work, but I need to amend her return to say she paid the bank rather than her Dad, so they won't look for interest income on his return.

That is, if there is an oral agreement between her and her Dad that she make all payments and pay for everything to do with the upkeep of the house.

[Harvey Lucas]

No deduction for daughter.

As I understand what you have posted..the daughters name is not on the title and is not on the mortgage....I dont see any rationale that would allow daughter to claim a deduction for interest???

That is the price she has to pay for not actually owning it.

I can see a few potential ways that dad could deduct the interest..maybe as a second home...maybe as investment property...if investment property then of course interest deduction is limited to his inv int incm...but then you have the problem of the daughters payments...

daughter is paying dads debt at the bank...kinda sounds like rent..you can argue that it is a gift but that seems a bit weak...

it really sounds like dad should treat it as a rental property..

but again...I dont see any way that daughter can claim interest deduction if she is not named on the mortgage...

HarveyLucas

[Bees Knees]

Yes, that is the rule.

The court case I cited ignored the rule and gave the taxpayer a break because the court determined the taxpayer was the one who was really obligated to pay back the mortgage.

Sometimes courts do that when circumstances justify it. The reasoning is that the Dad is on the title in name only. The daughter is the one who actually bought the house with her money and is liable for the loan repayment. Dad has nothing to do with it, other than his name being on the title. If for some reason he put up some of the money, then that would be another matter.