Transfer of RE Mother to Son

[RayT]

Widowed mother wants to Quit Claim Deed existing home to son. Will pay reasonable rent until her death. Son wants to keep current low interest mortgage which is in mother's name. My read is that he cannot use the mortgage interest as a deduction unless he is legally responsible for payments. Correct?

[erchess]

Forgive my ignorance

but how is she going to convey title to the property to her son without either paying off the mortgage or having her son approved by the lender and obligated to repay the loan?

I have a great scheme here. You buy a house with whatever mortgage you need to make it happen. Then you quitclaim the property to me and we'll stiff the mortgage company while I sell the house and you and I split the proceeds. There just has to be a reason why neither she and her son nor you and I could get by with this.

In case it isn't obvious I have no idea what a quitclaim is and it wouldn't be surprising to me if we don't have them in NC or we call them something else.

[Y2KEA]

A quit claim is a legal document which conveys real estate.

If the son now holds legal title to the house, he has an economic interest in it.
If the mortgage is not paid by the mother, he would want to pay to keep the house out of foreclosure. Therefore he has deductible mortgage interest.

As far as the lender is concerned, the loan contract would address a due on sale situation.

Quit claiming & then renting from the son may be a bad move. He now has mom's adjusted basis for depreciation & gain/loss on any disposition. If she retains a life estate then this is an uncompleted gift which would enjoy a step up in basis on her death.

Just my 2¢.

[Burke]

[QUOTE=erchess;62336In case it isn't obvious I have no idea what a quitclaim is and it wouldn't be surprising to me if we don't have them in NC or we call them something else.[/QUOTE]

A quitclaim deed (whereby the grantor "quits" or gives up claim of ownership or rights to the property) does not release the party quitting claim from their obligations under any mortgage or other lien secured against said property. It's a quickie deed with no title search or guarantee, and is most often limited to intra-family transfers. I cannot see where the son would have any rights to deduct mortgage interest unless he refinances in his name, although if it is rental property I suppose he could depreciate it if he claims the income. Some states or localities may not even recognize it as a deed and they may not consider the buyer a bona fide purchaser for value. Make sure you know your client's state/local laws. Most often this is done to allow Mom to be eligible for Medicare (nursing home expenses). Hopefully, there are no other heirs, or there can be problems.

[solomon]

My read is that he cannot use the mortgage interest as a deduction unless he is legally responsible for payments. Correct?

Not necessarily. A beneficial or equitable owner is entitled to deduct interest as well as taxes. Provide more information. Does the mother own two homes one of which she wants to quitclaim to the son?

From Reg. 1.163-1(b)

"Interest paid by the taxpayer on a mortgage upon real estate of which he is the legal or equitable owner, even though the taxpayer is not directly liable upon the bond or note secured by such mortgage, may be deducted as interest on his indebtedness."