What are the tax implications of someone buying a house for someone else?
December 10, 2012 7:21 AM   Subscribe

YANMREA - You are not my real estate agent (nor my tax attorney) - but maybe you have some experience and insight on implications of one person buying someone else a house to live in.

My mother, who lives in another state from me and my husband, has offered to put in some money to help us buy a home. The catch is, she wants her name on the deed so she can deduct the interest on her taxes. I see several complications to this, but I have no idea what the impact is. Do you know anything about:
  • Does she get to deduct the full interest payments on her taxes if she does not live there? Partial deductions?
  • What if she lives there 51% of the time?
  • What if we pay the mortgage payments entirely, does that effect who gets the deduction for the interest payments? (e.g. If her name is on the deed, she paid the down payment, but we pay the mortgage payments which include the interest.)
  • Do people ever split mortage payments, where one party pays the principal portion and another pays the interest and taxes?

If it helps, we both get along with my mother very well and are close despite living in different states. We trust her with money, she is smart and competent generally, and we are not concerned with any quid-pro-quo expectations as a result of her generosity.
posted by juniperesque to Home & Garden (6 answers total)
You may find this IRS publication helpful. Consult a tax adviser.

Also, FWIW, know that the mortgage interest deduction is one of the many tax benefits that are being considered for repeal to fix the budget. Whether this passes or not is anyone's guess, but I could definitely envision a repeal (or cap) for higher income payers, or a repeal in whole or in part of non-primary residences.

This is not tax or legal advice, and I am not your lawyer. Consult competent tax and real estate lawyers in your jurisdiction.
posted by Admiral Haddock at 7:37 AM on December 10, 2012

Okay, my first impulse is to say DON'T DO THIS!!!!

Now, I can answer your questions.

Having your Mom's name on the deed has nothing to do with whose name is on the mortgage and who gets to deduct mortgage payment interest.

Whether or not she lives in the home has nothing to do with it.

What percentage of the total cost of the house would she be giving you?

If your home costs $100,000 and she's giving you $10,000 does that mean she owns 1/10th of your house.

Also, having your Mom on the deed can lead to huge problems should you die. Would you want your husband to have to give your Mom 1/2 of your house?

The way that mortgages work is that they are amoratized. Go on online and look for a mortgage calculator with an amoritization table.

In the beginning of your mortgage, you may pay 1% in principle, and 99% in interest. and every payment, it shifts slightly so that at the end of the mortgage you're paying 99% in principle and 1% in interest.

This has significant impact on how you deduct mortgage interest from your taxes.

So in year 1, you may get $1,000 per month in interest deductions, or $12,000. In year 2, it may only be $11,000 annually, etc.

You should really talk to a CPA.

But I don't care how close you are with your Mom, unless she's willing to 'gift' the money to you, with no strings attached and no expectation of interest deductions, etc. Politely decline her offer and keep saving up for your down payment.
posted by Ruthless Bunny at 7:39 AM on December 10, 2012 [3 favorites]

There are ways to work this out, but you will need a real estate attorney to make sure it's done properly and to the advantage of all parties involved. BTW, generally, if somebody else owns the house and you live in it, the term you are looking for is renter ;) That is not all bad. You probably can work out some rent to own scenario where your mother gets the tax benefits today while some portion of your rent payments are set aside towards a down payment when you buy the house from your mom or her estate later.
posted by COD at 7:46 AM on December 10, 2012

Dear Mom, doing this right will cost more in lawyers and hassle than the deduction you might get.
posted by zippy at 8:08 AM on December 10, 2012 [3 favorites]

Having your Mom's name on the deed has nothing to do with whose name is on the mortgage and who gets to deduct mortgage payment interest.

This is correct. The income tax deduction is for interest paid on the home loan. It has nothing to do with the name on the deed. If you make the loan payments, you are the ones entitled to the deduction. Your mother does not understand what is going on. She's not even going to get to take a deduction on the property taxes because those are almost assuredly to be escrowed as part of your loan payments.

While I am sure your mother is well-intentioned, please tell her that no one ever got rich on deductions.
posted by Tanizaki at 8:58 AM on December 10, 2012 [1 favorite]

Yeah, I've gotta agree with Ruthless Bunny: don't have Mom's name on your deed! Even having her name on just the mortgage sounds iffy to me, but consult a tax accountant and a lawyer to confirm the benefits and drawbacks.

What worries me is what happens if any one of the three of you --- your mother, your husband or yourself --- should die? If the deed specifies that each of you owns one third of the house, who inherits that third? If your mother has a spouse or you have siblings, would her third be shared out as part of her estate, or would she make a will that clearly states you and/or your husband inherit it? If the deed does NOT specify who owns what percentage of the house, then that might make the inheritance situation even worse.

How long would this shared house-ownership situation last --- is this something permanent, or would there be a specified date whereby you and your husband would buy out your mother? What about if you want to move and sell the house, but your mother, a shareholder in the property, refuses? Heaven forbid it would happen, but what about if you and your husband divorced --- who gets what?

I'm sorry, but the best thing would be a clear gift from your mother, not any shared deed or even just the mortgage.
posted by easily confused at 5:20 PM on December 10, 2012

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