RE taxes & mort interest on 2nd home with sister

[KJ Judd]

I haven't seen this situation discussed. My client is helping his sister purchase a home. Downpayment of $60k from my client, $150k from sister (CA house cost $880k). Both names are on title to home. Due to sister's lower income level, only my client (brother) is on the mortgage.

Brother is making full mortgage payment including escrow for real estate taxes. I'd consider this his second home. So I'm thinking I can deduct 100% of the mortgage interest he pays. Can I also deduct 100% of the real estate taxes he pays?

Their plan is for the brother's payments to offset the difference in downpayment.

[JAinNC]

Legal liability

to deduct the interest. But in this case it is not half and half. Not sure if he prorates by percent.
There a Tax court case that rule to allow TP to deduct all mortgage interest. The taxpayer occupied the home and made all mortgage payments because his brother could not obtain financing (Uslu,U.S. Tax Court, December 16, 1997) From TheTaxBook 2006 page 4-11.
This is a different situation. I would think it might be prorated.

[solomon]

Does your client

own a qualified residence on which he has acquisition debt? If so, how much?

[Bees Knees]

Does the taxpayer own the home? Yes, he and his sister are both listed on the title.

Is the taxpayer legally Liable for the debt? Yes, his name is on the mortgage.

Is the debt secured by the house? I assume it is.

Did the taxpayer actually pay the mortgage interest he is trying to deduct? Yes.

Is the home a second home of the taxpayer? Lets say for purposes of our discussion, a brother who owns a home with his sister and makes all mortgage payments is going to from time to time use it as a second home (such as visits, repairs, etc. etc.).

Answer: The taxpayer can deduct all interest paid as second home mortgage interest. There is nothing in the rules that says anything about pro-rating the interest based upon ownership percentages. He is liable for 100% of the mortgage interest (the mortgage is all in his name), and he actually pays 100% of the interest.

[joanmcq]

He doen't even need to visit, make repairs or anything. He owns a second home, makes the payments and is responsible for the payments. He gets the deductions.

[JAinNC]

Okay

I see that he has the right because the mortgage is in his name. The home is in both names. Does it matter that he doesn't own the entire home? If he owns one half, his half = 880K / 2 = 440K. After the down payments the mortgage balance = 670K. Can he still deduct the entire mortgage? Asking because I have calls from people who are planning to do something like this and want to know what is deductible. Every situation is a little different.

Jeannie

[KJ Judd]

And the Real estate taxes? I think he may be limited to 50% since they both own the house. However, he will be the only one paying the real estate taxes.

[joanmcq]

The RE taxes are the same; he has to be a responsible party and pay the tax. If he pays 100%, he gets to deduct 100%. If they paid 50/50 they each get to deduct half.

[S T]

Another Issue

How much of Home mortgage interest paid will qualify as a deduction?

Secured Debt - includes loans secured by the taxpayer's main home or a second home

Acquistion Debt=total acquistion debt on main and second home combined which is limited to $1million

Then there is the equity debt that might not qualify as acquistion debt, which would equal to no more than $100,000 combined on primary or second home.

See TB page 4-11.

So you might still have some limitations on the deductions of your mortgage interest, if t/p is over the $1million + $100K

Sandy

[JAinNC]

Exactly my point.

[Bees Knees]

I see that he has the right because the mortgage is in his name. The home is in both names. Does it matter that he doesn't own the entire home? If he owns one half, his half = 880K / 2 = 440K. After the down payments the mortgage balance = 670K. Can he still deduct the entire mortgage? Asking because I have calls from people who are planning to do something like this and want to know what is deductible. Every situation is a little different.

As Sandy said, acquisition debt=total acquisition debt on main and second home combined which is limited to $1million

The rule says nothing about ownership in FMV equity. It simply puts a limit on the amount of debt you can incur. If the home was worth 880K and he was a 50% owner, the 440K share of equity is irrelevant. He borrowed 670K to purchase his share of a home worth 880K. His acquisition debt of 670K is less than the 1 million limit. Assuming his 1st home doesn't put him over that 1 million limit, he should be able to deduct all of the interest paid.

[sea-tax]

And the Real estate taxes? I think he may be limited to 50% since they both own the house. However, he will be the only one paying the real estate taxes.

If he is the one paying 100% of the property taxes, then why would he not be able to take 100% of the deductions?

[JAinNC]

Thanks

I have some situations that come up that are similar.It is good to have wise input from you guys.
Jeannie

[KJ Judd]

Sea-tax -

I thought, perhaps, the IRS would deem him to make a gift to his sister for her 1/2 of the real estate taxes since he didn't own the entire property and they are both liable for the taxes. However, I was hoping to hear what I'm seeing on the board. My client is in a much higher tax bracket than sister.

Kathy

[SunTaxMan]

Perspective

Your comment, "I'd consider it his second home," gives me concern. I think we, as Preparers, are on "thin ice" when we translate our perspectives to become the taxpayer's perspective, rather than focus on the taxpayer's intent in any situation, and use that as our starting point.

I think the primary consideration should be how the taxpayer views this "second home," i.e., does the taxpayer consider it a "home" for him, or is he helping his sister have a home?

In either case, the deduction for interest and RE taxes belongs to (1) the person who is legally liable for the debt AND (2) the person who is making the payments - whether that is 100%, 50/50%, 70/30% - apportionment based on "facts" of whose money/obligation is involved.

With these considerations in mind, "gifting" may be part of this situation.

Granted, within the economic limits of mortgage interest deductions, if he is making the payments, he can deduct the 1098 interest, but if (1) he is helping his sister have a home and (2) he decides he would like to buy a boat or motor home {that qualifies for 1098 interest}, he then might lose the deductibility of his sister's residence.

The other consideration here is Section 121, if and when this house would be sold. If he owns the property and she lives in it, neither could claim the exclusion.