Kids with No Credit

Today TaxMama hears from Taylor in the TaxQuips Forum, with a common dilemma.  “My clients just moved back from Australia. They don’t have any credit established in USA.  I recommended that Mom purchase the home with the mortgage loan will be in her name only.  She can add the kids to the title.  The kids can make mortgage pmts from day one.  Someone told Mom that there will be tax implications if she buys the home and takes out a mortgage loan in her name.  But she won’t be living in it; she won’t use it as a rental.  Does she still have to complete schedule E, etc?”

Dear Taylor,

It’s not so much about Mom having tax implications, as it is about making it possible for the children to take the mortgage deduction.  Clearly, from your description, they will be the beneficial owners.

I would arrange to have a solid paperwork trail to ensure they could deduct the mortgage interest – otherwise, no one will be able to. So, once the purchase is completed, an attorney can draw up proper loan documents between Mom and the kids. The loan can be for the same amount as the loan Mom has obligated herself for. It can show the same payment amount that Mom must make. It can even say that the payments may be made to a third party on her behalf – the third party being Mom’s mortgage company.  Getting that paperwork trail in place will make it possible for the young couple to deduct the mortgage interest. Mom will pick up interest income – and the same amount of interest expense. If Mom is already itemizing deductions, this will break even. If not – Mom WILL have some taxes to pay. Have someone review the numbers.

It really would be sooooooooooooo much easier if Mom could add them to the loan in the first place.

As to title – Mom can either transfer title immediately, which I never recommend as long as she is on the hook for the mortgage. Or the attorney can draw up a land contract  (and sell the house for a dollar more than she paid for it). The land contract doesn’t cause title to pass until the last payment is made. In fact, looking at a sample land contract, this seems to be all you need – it’s both a loan document and intention to transfer title. You won’t need a separate loan document.

What’s if they don’t do this? Then whoever told Mom she has tax implications IS right. Mom will have rental income (the payment the kids make to the mortgage company + their property tax payments) to report on Schedule E.  She will be able to deduct the interest expense, property tax and depreciation. So she will get a little tax benefit. She can put the property in her will for the children. They can inherit it from her when she dies.

Meanwhile, the children don’t get an interest deduction. They don’t build up any of their own credit. 

Anyway, there are a number of ways to handle this. But I like my first suggestion best for all concerned. Please get some legal help to do this properly.

 And remember, you can find answers to all kinds of questions mortgage interest, and other tax issues, free. Where? Where else? At

[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 join link – it’s free!]

Please post all Comments and Replies in the new TaxQuips Forum