Today TaxMama hears from Lorraine in New Jersey with these questions.
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“My father is giving us the cash to pay off our mortgage.
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How does this effect our 2008 income? Is paying off the mortgage a deduction?? How does gifting apply?”
Dear Lorraine,
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.
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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: https://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
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- TaxQuip #993 :: All about the Gift Tax
- IRS Publication 950 :: Introduction to Estate and Gift Taxes
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