Payment of mortgage in lieu of child support

[Happy Camper]

TP purchased a house for his ex-wife and daughter (minor) and pays a portion of the mortgage in lieu of child support (not court mandated). Ex-wife pays balance of mortgage. House is in TP's name. Is there any 'rental' income to be claimed by the TP? Is mortgage interest & property tax Sch A deduction or Sch E? TP will probably max out SALT deduction with personal residence and this is the only other house owned.

Should the ex-wife pay her portion of the mortgage to TP and TP pay mortgage direct or vice versa? Will this make a difference to Sch A/Sch E treatment? Are there any other ways to structure this to make it more beneficial/streamlined?

Appreciate any advise or issues to be aware of.

[kathyc2]

I think it would boil down to what is the intent between the parties.

Is there any written agreement between them? What would happen if she wants to move; would she receive any equity in the house? Even if support is not court mandated, there probably is an amount in divorce decree. How does the amount she is paying toward mortgage compare to the fair rental value of house? Are they both listed on mortgage or only him?

[Dude]

and his reward for dutifully paying the mortgage? A bill for the back child support he never paid! Seriously, what makes him think he can call this child support?

[ATSMAN]

People often make informal agreements during divorce so look at the legal basis. The house is in the TP's name only, correct?. He pays the mortgage to the bank. I am assuming this is a second home for the TP?

He gets to decide if he will benefit by itemizing (subject to SALT) or taking the standard deduction.

Ex wifes arrangement regarding child support has no legal connection with the mortgage payments.

[Dude]

Again, he is not making a child support payment, he is making a mortgage payment. Furthermore he is also collecting rent since the house is not jointly owned. Oh and if her "part of the mortgage (remember the mortgage does not have her name on it so it is actually rent) does not amount to the going rental rate for a house than this is not regular rent but charitable rent meaning the entire house is personal use. since I doubt they are paying market rates, his deductions are limited. If he wanted to make things "simple" he would resist the urge to be creative and write a check for child support and give the ex wife half of the house they shared, not buy her another one. Nice guys finish last....there is a reason people say this and this guy is a good example.

[kathyc2]

Nice guys finish last....there is a reason people say this and this guy is a good example.

Haha! We don't have enough facts to actually know, but it sounds to me that she is the one getting screwed over. She's not getting cash child support, but instead he is putting the money he should be paying for support into an investment that he alone may reap the appreciation benefits on.

[Burke]

She may not be getting child support, but she is getting at least partly free housing. Not sure what is meant by "her share" of mortgage" but since he owns house, I can't see why it is not rental income to him, assuming mortgage is in his name. I don't see how her name could be on it as she has no ownership interest. Since they have one daughter Is ex-wife paying half? KathyC2 is correct in that it is an investment to him and he would benefit by any appreciation. I don't see how he can put anything on a Schedule E, however. He would have to claim the income as Other ordinary income on a not-for-profit rental, and capitalize any taxes he could not deduct on Schedule A, IMO.

[kathyc2]

I don't see how her name could be on it as she has no ownership interest. Since they have one daughter Is ex-wife paying half?

It's not all that uncommon for someone to co-sign a mortgage when they are not listed on title.

[Happy Camper]

Thanks for all your responses! To clarify a few issues: TP pays the court mandated child support. The marital home was sold several years ago. TP's living situation has improved and rather than pay attorney's to go back to court for additional child support, his Ex & him came to this agreement. I am not clear if there is anything in writing. I would hope that any possible child support pitfalls have been addressed with his attorney. I am just trying to make sure any tax issues that may exist are addressed.

That being said, after looking back on my notes, I am not clear if TP pays the extra child support and ex pays the mortgage, or if TP pays part of the mortgage and ex pays the balance. That is part of the question-does the flow of cash between TP, Ex & mortgage company matter when it comes to whether it is Sch E or Sch A/line 21?

I am fairly certain that the portion out of ex's pocket is not fair market rental value. However, if TP gave her the cash that he pays to the mortgage and ex gives him back the full mortgage amount, it is possible that total could be fair rental value.

TP is not trying to avoid any tax, as his tax preparer, I have a duty to minimize any tax liability and sometimes the way something is structured can make a difference. TP was kind enough to let me know what was happening before he handed me his 2019 tax information, so I figured I would return the favor and make sure everything is set up and set to be reported properly before April 15

[Dude]

TP makes an "extra" child support payment that equals his mortgage payment. Ex gets tax free income she uses for living expenses (mortgage). They believe rental income is avoided because ex is probably paying the mortgage company directly having the entire mortgage payment taken out of her checking account. Ex can then demonstrate 50% support of child and thus claim all credits entitled by someone with a qualifying child. TP is benefiting with equity and also gets the Mort int deduction.,

If my facts are correct now, I think the rental income has moved into a grey area and does not seem clear cut. The big downside that remains: If this extra child support was ever enforced, because it is not clear if he paid child support per se, he could wind with a bill. Then again, this is a private agreement. I too would not want to get involved with this side of your clients life BUT:

IMO, distancing yourself from the extra child support as a non tax issue is a mistake. I think you need to see a written agreement.

[ATSMAN]

IMHO unless it can be proven that there is a rental agreement, an ex wife living with the taxpayers child in a second home owned by the taxpayer is just the same as if your adult children lived in your second home and paid the utilities etc. OP did not say if the homeowner was claiming any rental deductions.

I think the goal of the taxpayer was to somehow deduct "child support" payments. Good try! He can deduct mortgage interest, RE tax subject to SALT limitations.

[Dude]

IMHO unless it can be proven that there is a rental agreement, an ex wife living with the taxpayers child in a second home owned by the taxpayer is just the same as if your adult children lived in your second home and paid the utilities etc. OP did not say if the homeowner was claiming any rental deductions.

I think the goal of the taxpayer was to somehow deduct "child support" payments. Good try! He can deduct mortgage interest, RE tax subject to SALT limitations.

I see your point in comparing the situation to an adult child but it could also be akin to a shared rent situations where the homeowner calls the occupants roomates and also does not declare the income as rent. The absence of a bright line as to what constitutes rent is bothersome. If rent is not declared, is it paid? Can the roomate tell a welfare agency they pay rent if the rent is not declared?

[ATSMAN]

If rent is not declared, is it paid? Can the roomate tell a welfare agency they pay rent if the rent is not declared?

I am not sure if this was an issue in the OP. Perhaps we drifted to another conversation. But in general I have seen many "expense sharing" not for profit arrangements where one party says that they pay share of the "cost of living in a house". I believe welfare and other social agencies that that into account for determining benefits in my state based on an income/living expense formula.

[kathyc2]

If I'm understanding correctly, rent income would be both the amount BOTH of them pay toward the mortgage. I'm not seeing why people are saying he could deduct the amount of interest and taxes on Sch A. Part of it the ex is paying, the part he is "paying" is really not a payment. If he were making a cash payment to ex it would not be deductible, and just because he is paying it directly to bank does not make it deductible IMO.

If it were my client I would strongly recommend that they add a little paperwork as follows. He writes a check to her for child support. She writes a check to him for rent. He writes a check to bank for mortgage payment. I would also recommend they have a written rental agreement. Just because they currently agree to the arrangement, there is no guarantee agreement will continue.

[Burke]

It's not all that uncommon for someone to co-sign a mortgage when they are not listed on title.

No, but that would mean either party could be held liable for the whole thing in the event of non-payment. High risk for this scenario.