Today TaxMama hears from Lorraine in New Jersey with these questions. “My father is giving us the cash to pay off our mortgage. How does this effect our 2008 income? Is paying off the mortgage a deduction?? How does gifting apply?”
What a terrific thing for him to do.
To answer your questions, there is no effect on your 2008 income.
No, there’s not deduction for paying off the mortgage. You get a deduction when you pay interest – never principal. Sometimes, shelling out that much money, it’s hard to understand why there’s no deduction.
In fact, many, many years ago, I lost a business client once because she simply could not get the concept through her head that paying off the equipment loan for her gym was not a deduction. (She had already gotten a deduction for buying the equipment. You don’t get to deduct it twice.)
In your case, you don’t get a deduction for buying the home. But when you sell it, you’ll get to deduct the purchase price from the sale price – PLUS $250,000 each for you and your husband as a personal residence exclusion.
As to the gifting issue. That’s a big one. Your father should be talking to a tax professional to make sure that he handles this properly. Otherwise, he will be stuck with a huge Gift Tax bill. The rate, just for IRS, could be as high as 35% or 45%, plus whatever NJ charges.
There is certainly a way to avoid paying any gift tax at all. But the proper forms must be filed.
You can read more about how the gift tax works here: http://www.taxquips.com/index.php?id=993
Enjoy the generosity – and be really, really nice to Dad.
And remember, you can find answers to all kinds of questions about gifts and other tax issues, free. Where? Where else? At TaxMama.com[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the subscribe link and join us.]
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- TaxQuip #993 :: All about the Gift Tax
- IRS Publication 950 :: Introduction to Estate and Gift Taxes