Today TaxMama hears from Sally in Pennsylvania who has this question. “My daughter and her husband live in my home in western NY. They pay the mortgage, taxes and insurance. Is there any legal way for them to claim a deduction for the interest and taxes?”
In order for someone to be entitled to take deductions for a home mortgage and the taxes, they have to meet two tests:
1) They have to own the home – or at least part of it.
2) They must be liable for the mortgage.
And of course, they actually have to make the payments.
To meet the first test, you can add them to title by gifting or selling all or part of the home to them. One thing that I’ve seen done is to sell or gift the home while retaining a life interest in it. That means you get to own the house until you die. No gift taxes become due because the gift isn’t complete. It’s got strings attached.
You can arrange to make them liable for the mortgage by either adding their names to the loan, or by preparing an all-inclusive trust deed between you and your daughter (and husband), with instructions
for the payments to be made to a third party – your lender.
Of course, in the second case, you’d have to pick up the mortgage interest income, and then deduct the mortgage expense. That may or may not generate a tax for you, depending on your other sources of income and the amount of the mortgage.
They would then be able to deduct the mortgage expense.
Before you do anything along these lines, please meet with a tax attorney to work out the best way to arrange anything without your losing control of your home.
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