Sister buys a house for brother

[dkss]

A lady bought a house for her brother to live in. He gives her the money every month to pay the mortgage payment. Someday, he will get a mortgage in his name (hopefully). There is no written agreement between the siblings. How should this be shown on her return? Line 21 other income with sched A deductions? Or could this be just gifts between the siblings?

Thanks in advance.

[LMathey]

I would first want to know how much in total he gave her. Then I would want to know what the rent in her area for a home like that would be. Let's say that rent would be $800 a month and he is giving her $500. She then is gifting $300 a month to him... well below the amount requiring a gift tax return. Usually cases like this are sub par rents so I would be reluctant to file Sch E as a rental property and take any losses.

Since you can own more than one home she should be able to take the mortgage interest and taxes on Schedule A. Especially since the home is in her name and she could ask him to leave at any time or she could sell it to someone else. I assume the reason she is not doing a seller financed mortgage is that she does not feel confident that he will follow through and make the payments to her once the deed is in his name.

[Burke]

Assume house is in your client's name. Could be considered second home "not rented for profit." Income goes on line 21. Client can deduct int and taxes on Sche A. Other rental expenses go on Sche A, line 22. Expenses deductible only up to rental income. See Chapter 1 of Pub 535.

[dkss]

The house was purchased in Feb and he paid her a total of $8238 for the year. He could rent a house cheaper than that around here.

[dkss]

Burke: I was thinking about treating it as a not-for-profit rental, but was wondering when she sells will she put it on a F4797 or just straight on a sched d?

[BP.]

See Chapter 1 of Pub 535.

Maybe pub 527??? But thanks for the reference; I needed to check some vac home rules for upcoming appt. OK, nevermind . . . just saw the section in pub 535.

[myerstaxes]

Could Be Equitable Ownership

Hi, I ran across a court case that was here in CA...The brother purchased a home for his brother because his credit was not good enough...The brother who lived in the house did everything a home owner does, and paid the mortgage, taxes, insurance and upkeep of the home...The IRS denied the brother who lived in it the mortgage interest deduction because he did not own the home...However, the courts decided that the brother who lived in it and paid all expenses of the home, had equitable ownership and allowed him the mortgage and real estate tax deduction...So you could look at it that way...If the situations are similar, I cannot locate the case right now, but if I find it I will post...

[veritas]

Look at page

4-11 in TTB.

[dkss]

I found the court case reference in TTB. Many thanks to all!

[solomon]

The brother is the beneficial owner and should be making payments directly to the lender. He should be paying all other costs associated with the residence as well including taxes. It is not necessary to be a legal owner to be a beneficial owner.

The key in all the court cases is did the beneficial owner bear all the burdens and benefits of ownership.

Unless this is a rental arrangement, and in fact it is a beneficial ownership arrangement, the sister is not entitled to deduct anything.

[hyacinth]

so beneficial ownership trumps legal liability?

Are you saying that legal liability is not a requirement if one wants to to deduct mortgage interest and taxes since a court case said so ? If a relative owns the house,thatt you live in and instead of "rent" you pay the mortgage and taxes none of which you really are liable for since the you're not even on the deed you can still deduct it? The pub still says liable. Is this black and white or gray?

What does the IRS have to say about this?

[solomon]

Are you saying that legal liability is not a requirement if one wants to to deduct mortgage interest and taxes since a court case said so ? If a relative owns the house,thatt you live in and instead of "rent" you pay the mortgage and taxes none of which you really are liable for since the you're not even on the deed you can still deduct it? The pub still says liable. Is this black and white or gray?

What does the IRS have to say about this?

Try reading Reg. 1.163-1(b) - a bit more authoritative than your pub. "...since a court case said so?" Several cases have said so. It is black and white if the burdens and benefits of ownership are established.

REG-138637-07 includes proposed modifications to Cir. 230 and cites Reg. 1.6662-4(g)(3)(iii) as types of authorities practitioners may rely upon for treatment of a tax position. Among others, court cases are included. Publications do not appear.

[BP.]

The brother is the beneficial owner and should be making payments directly to the lender. He should be paying all other costs associated with the residence as well including taxes. It is not necessary to be a legal owner to be a beneficial owner.

The key in all the court cases is did the beneficial owner bear all the burdens and benefits of ownership.

Unless this is a rental arrangement, and in fact it is a beneficial ownership arrangement, the sister is not entitled to deduct anything.

I've looked at this thread, TTB 4-11, and the Uslu case. I'm trying to see if a client is an equitable (or beneficial) owner of real estate, and eligible for a mortage interest deduction.

Her mom is on both the mortgage and the deed. The client is on neither. The client directly pays the mortgage company from her checking account. The client and her mother both live in the house. The client does not pay the real estate taxes. I'm wondering if these last two facts might weigh against client's claim of equitable ownership.

The client is insistent she deduct the mortage interest she pays. She is a new client, and told me the interest was deducted in 2006. When I reviewed the prior year return, however, it was just the standard deduction. Maybe the former preparer didn't think she qualified. Maybe that's why she isn't using the former preparer. She has taken to shouting and ranting on the phone about this, (I cut that off real quick with a good-bye) so I may just dump her for that alone. But I'd still like to know about proving equitable ownership.

What also makes this situation not feel right in my gut, is that this client is a paralegal, and she told me that her lawyer (who she says is in taxation), as well as two accountants told her this interest is deductible for her. Not that I am taking those statements at face value, but if true, why wouldn't one of these trustworthy pro's prepare the return for her???

[solomon]

I've looked at this thread, TTB 4-11, and the Uslu case. I'm trying to see if a client is an equitable (or beneficial) owner of real estate, and eligible for a mortage interest deduction.

Her mom is on both the mortgage and the deed. The client is on neither. The client directly pays the mortgage company from her checking account. The client and her mother both live in the house. The client does not pay the real estate taxes. I'm wondering if these last two facts might weigh against client's claim of equitable ownership.

The client is insistent she deduct the mortage interest she pays. She is a new client, and told me the interest was deducted in 2006. When I reviewed the prior year return, however, it was just the standard deduction. Maybe the former preparer didn't think she qualified. Maybe that's why she isn't using the former preparer. She has taken to shouting and ranting on the phone about this, (I cut that off real quick with a good-bye) so I may just dump her for that alone. But I'd still like to know about proving equitable ownership.

What also makes this situation not feel right in my gut, is that this client is a paralegal, and she told me that her lawyer (who she says is in taxation), as well as two accountants told her this interest is deductible for her. Not that I am taking those statements at face value, but if true, why wouldn't one of these trustworthy pro's prepare the return for her???

I agree with you. Your client is not a beneficial owner in this case and not entitled to the deductions. Normally, the beneficial owner has poor credit and the legal owner is merely assisting in obtaining the home. The legal owner does not reside in the home and at some point title will pass to the beneficial owner.