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    Land Contract to child

    My brother wants to purchase a house but cannot obtain financing so my Dad wants to purchase the home and set up a land contract w/ brother making the payments directly to the bank. Off the top of my head I'm thinking Dad will be able to write off the mortgage interest against the "interest" from the land contract. There will be no gain or loss or increase in interest amount the bank is charging.

    Sounds to easy - am I missing some tax implications?
    http://www.viagrabelgiquefr.com/

    #2
    Mortgage payments

    The father would have to be already itemizing on Sch. A to get any benefit from deducting the interest on the mortgage. He would have to report the interest income on 1040, and that could affect the treatment of other income, ie: Social Security, tax credits, maybe even put him into a higher tax bracket.
    "A man that holds a cat by the tail learns something he can learn no other way." - Mark Twain

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      #3
      Interest income and expense.

      Originally posted by taxmandan View Post
      The father would have to be already itemizing on Sch. A to get any benefit from deducting the interest on the mortgage. He would have to report the interest income on 1040, and that could affect the treatment of other income, ie: Social Security, tax credits, maybe even put him into a higher tax bracket.
      I agree and have personally had the same kind of situation, but not with a relative.

      I sold my previous home on a contract for sale (Texas version of Land Contract). I report the interest I receive as investment interest income on Schedule B. For a while I was still paying off the mortgage I had from when I purchased the place and deducted it on Schedule A as Investment Interest Expense.

      If I had not been itemizing my deductions, I would not have had any benefit from the interest I was paying since it was no longer home mortgage interest.

      The same method should be followed in the situation in this case.

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        #4
        Thanks for the replies. Would there be a way to structure the transaction so that there is no tax implications or Dad would not have to claim any interest income?
        http://www.viagrabelgiquefr.com/

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          #5
          No tax implications

          Originally posted by Jesse View Post
          Thanks for the replies. Would there be a way to structure the transaction so that there is no tax implications or Dad would not have to claim any interest income?
          If the father collects interest he should report it, but there MIGHT be a way to avoid any tax increase/decrease. If the interest Dad collects is the same or less than the interest he pays, it would be a washout--provided that he itemizes his deductions--and further provided that he would have enough to itemize vs taking the standard deduction even without the interest on the house for his son.

          Note that if his itemized deductions are $ 5000 less than the standard deductions but are increased by $6000 from the new mortgage, all he would get is a $ 1000 increase in his deductions whereas the total interest income would be taxable.

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