House payment deduction

[TAX]

Client, in illinois, purchased a town house in Florida, in March 07, for his son who is in college in Florida.

Title is in son's name where as loan is under parents name. Parents making mortgage interest and tax payment.

Who should deduct mortgage interest and tax payments?
Also is there any tax planning opportunity here?

Thank you!

[dsi]

I don't have an answer for you, but out of curiosity, what financial institution would allow this kind of arrangement? i.e., son holds title, parents liable for the debt.

[Deborah]

2nd home or rental?

The son cannot deduct the mortgage interest - he is not the mortgagee. The parents probably cannot either since it is not a second home or rental and they do not hold title. Property taxes - the parents can't deduct that either - they do not hold title to the property. Looks to me like the parents opted out of all of their tax deduction options the way they worked this deal. Are you sure there is no co-ownership on this property?

[Bees Knees]

TTB, page 4-11,

Legal Liability
A taxpayer must be legally liable for the loan to deduct interest
on the home mortgage.
Example: Murphy lives in his mother’s house and is not listed on the
house title or mortgage. Murphy makes her mortgage payments because
he is supporting her as his dependent. Murphy cannot deduct
the interest as home mortgage interest because he is not liable for
the debt.

Planning opportunity: Make sure the guy paying the interest and taxes has his name on the title.

[Acownt4it]

Bees Said:
Legal Liability
A taxpayer must be legally liable for the loan to deduct interest
on the home mortgage.
Example: Murphy lives in his mother’s house and is not listed on the
house title or mortgage. Murphy makes her mortgage payments because
he is supporting her as his dependent. Murphy cannot deduct
the interest as home mortgage interest because he is not liable for
the debt. .
Make sure the guy paying the interest and taxes has his name on the title

I disagree with the interest part of the comment.

If the parents are making the payments, the loan is in their name, why wouldn't they be considered legally liable for the loan? The example you gave doesn't seem to fit this situation. It states that Murphy is making HER mortgage payments. I interpret this to mean that the mortgage is in the mother's name, so son is not legally responsible for the loan.
I read TTB pp 4-10 through 4-11 and do not find anything in there that says you have to hold title to the property in order to deduct interest.
Court Case on TTB pg 4-11 clearly state that.
I would let the parents deduct the interest, however the real estate taxes are not.
TTB pg 4-10 clearly states that the taxpayer must own the real estate to deduct real estate taxes.

[Bees Knees]

Section 163(h) disallows all deductions for personal interest paid. Section 163(h)(2)(D) provides and exception for “qualified residence interest (within the meaning of paragraph (3)).”

Section 163(h)(4)(A)(i) defines the term qualified residence as follows:

The term ``qualified residence'' means--
(I) the principal residence (within the meaning of section 121) of the taxpayer, and
(II) 1 other residence of the taxpayer which is selected by the taxpayer for purposes of this subsection for the taxable year and which is used by the taxpayer as a residence (within the meaning of section 280A(d)(1)).

Section 280A(d)(1) says:

For purposes of this section, a taxpayer uses a dwelling unit during the taxable year as a residence if he uses such unit (or portion thereof) for personal purposes for a number of days which exceeds the greater of--
(A) 14 days, or
(B) 10 percent of the number of days during such year for which such unit is rented at a fair rental.

OK, so what does all this mean?

If mommy and daddy don’t live in the house, they better use it for their own personal use for the greater of 14 days, or 10% of the number of days during the year for which it is rented at a fair rental. Rental use in terms of this code section basically means any use by anyone other than the taxpayer. So in other words, if the son lives their 365 days per year, that means it is as if it were rented for 365 days per year. So mommy and daddy have to live there and use it for personal use at least 36½ days every year.

I hope they all still get along.

[Luis Mopeo]

Section 163(h) disallows all deductions for personal interest paid. Section 163(h)(2)(D) provides and exception for “qualified residence interest (within the meaning of paragraph (3)).”

Section 163(h)(4)(A)(i) defines the term qualified residence as follows:



Section 280A(d)(1) says:



OK, so what does all this mean?

If mommy and daddy don’t live in the house, they better use it for their own personal use for the greater of 14 days, or 10% of the number of days during the year for which it is rented at a fair rental. Rental use in terms of this code section basically means any use by anyone other than the taxpayer. So in other words, if the son lives their 365 days per year, that means it is as if it were rented for 365 days per year. So mommy and daddy have to live there and use it for personal use at least 36½ days every year.

I hope they all still get along.

I think you might have a clinker there Mr. Knees.

For one thing, Section 280A(b): "Exception for interest, taxes, casualty losses, etc...Subsection (a) [disallowance of expenses on a vacation home] shall not apply to any deduction allowable to the taxpayer without regard to its connection with his trade or business (or with his income-producing activity)."

In other words, if you have 2nd home interest that is otherwise deductible, Section 280A does not limit that deduction. I'm not saying the interest is or isn't deductible in this case, but it's not limited by 280A.

There's also a problem with the in-laws having to move into the house for over a month. In your 14-day/10% provision, Section 280A(d)(2) says "the taxpayer shall be deemed to have used a dwelling unit for personal purposes for a day if...any other person who has an interest in such unit, or by any member of the family..."

The parents are considered to have used the unit for all days the son used the unit. They don't have to move in. What a relief!

[Bees Knees]

For one thing, Section 280A(b): "Exception for interest, taxes, casualty losses, etc...Subsection (a) [disallowance of expenses on a vacation home] shall not apply to any deduction allowable to the taxpayer without regard to its connection with his trade or business (or with his income-producing activity)."

In other words, if you have 2nd home interest that is otherwise deductible, Section 280A does not limit that deduction. I'm not saying the interest is or isn't deductible in this case, but it's not limited by 280A.

Irrelevant to our discussion as nobody said anything about limiting the deduction under Section 280A. Section 163 merely refers to Section 280A to define the term “used by the taxpayer as a residence.”

There's also a problem with the in-laws having to move into the house for over a month. In your 14-day/10% provision, Section 280A(d)(2) says "the taxpayer shall be deemed to have used a dwelling unit for personal purposes for a day if...any other person who has an interest in such unit, or by any member of the family..."

The parents are considered to have used the unit for all days the son used the unit. They don't have to move in. What a relief!

Section 280A(d)(2) says:

(A) for personal purposes by the taxpayer or any other person who has an interest in such unit, or by any member of the family (as defined in section 267(c)(4)) of the taxpayer or such other person;

Section 267(c)(4) says:

(4) The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants…

OK, I ran out of cites. It says nothing about whether a family member has to be a dependent of the taxpayer. Mommy and daddy are considered to use the house as a residence by the fact that their lineal descendant is using the house as a residence.

Interesting twist.

Interest is deductible. Taxes are not.

I still say either have both parents and son on title as joint tenants so that both taxes and interest would be deductible, or have mommy and daddy gift money to the son and let him pay the taxes and interest.

[Davc]

I say no deduction for either taxes or interest. The parents have no legal, beneficial, or equitable ownership in the property. They have been making gifts. If over the limit file a gift tax return each year.

[Bees Knees]

I say no deduction for either taxes or interest. The parents have no legal, beneficial, or equitable ownership in the property. They have been making gifts. If over the limit file a gift tax return each year.

Where does it say in Code Section 163 that you have to have legal, beneficial, or equitable ownership in the property for which the debt is incurred?

[TAX]

Thank you all.

In my research, I also found same thing as Bees said.

For a deduction Ownership & Liability both have to be there. There for parents can not deduct it as they are not the owner where as son can not deduct it as he is NOT liable.

[Davc]

Where does it say in Code Section 163 that you have to have legal, beneficial, or equitable ownership in the property for which the debt is incurred?

Are you now claiming it's investment or business interest? Qualified mortgage interest requires ownership.

[Davc]

Thank you all.

In my research, I also found same thing as Bees said.

For a deduction Ownership & Liability both have to be there. There for parents can not deduct it as they are not the owner where as son can not deduct it as he is NOT liable.

When agreeing with Bees, you need to specify the actual post you're agreeing with. Also, if the son paid i, he could deduct it under the "beneficial, or equitable ownership in the property" concept.

[Bees Knees]

Are you now claiming it's investment or business interest? Qualified mortgage interest requires ownership.

Where does it say that?

Qualified home mortgage interest requires that the loan be secured by the home. In this case, it is.

[TAX]

Quote:
Originally Posted by TAX
Thank you all.

In my research, I also found same thing as Bees said.

For a deduction Ownership & Liability both have to be there. There for parents can not deduct it as they are not the owner where as son can not deduct it as he is NOT liable.

When agreeing with Bees, you need to specify the actual post you're agreeing with. Also, if the son paid i, he could deduct it under the "beneficial, or equitable ownership in the property" concept.

Post # 8.