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<<In December, 1998 my wife, her sister and I purchased a house for our neice(the sister's daughter) and her husband. We did this because they could not qualify for a loan. >>

I have a different take. I absolutely HATE these transactions. They're convoluted from the beginning, and generally don't do ANYBODY any good from either a tax or estate standpoint. It's a shame that you guys just didn't structure this as either a rental or a shared equity agreement...both entire legal and appropriate. But let's move on.

<<This was a $50,000 house. Downpayment and Closing costs were paid by us and were about $15,000, leaving a loan of about $37,000.>>

And you don't tell who is liable for the loan...but I can only assume it's not the neice or her husband.

<<We are letting them make the mortgage payments (routed through my wife's sister to make sure they are timely).>>

That's nice of you. Problem is...they make the payments but NOBODY receives the tax deduction. In order for something to be deductible, it must meet two criterion:

1. The payment must be made
2. There is a legal obligation to make the payment

Since the loan is not in the name of the kids, they don't pass #2 above...and they don't get the deduction. If your wife's sister is taking the interest deduction, then she'll have to recognize the funds that she is receiving as SOME type of income...likely rental income. If you are happy that NOBODY receives the deduction, then that's just fine.

<<They are also paying an extra $100 per month to retire the 'no-interest loan' of the $15,000 downpayment/closing costs.>>

Which is money that you guys fronted to the kids. I'm guessing that you don't have any type of lien or mortgage against the any interest that the kids are paying would also not be deductible. This can be fixed with a simple 2nd TD placed against the property. If you are not charging them interest, then you might have some problems with the imputed interest was mentioned in the prior post.

<<Some time, 5-10 years from now, when they can qualify for a loan themselves we will sell them the house for the residual value of the two loans.>>


<<No one is planning to take any mortgage interest deductions.>>

To me, that seems just silly. You have some tax opportunities here...either via a rental and/or an equity sharing agreement. Simply leaving this interest payment on the sidelines seems to me to be a waste of money...and deductions. But that's just me. If nobody is claiming the interest...then so be it.

<<We do not want to treat this as rental property with depreciation and other stuff.>> least you gave it some thought and decided against it. I don't know exactly why...but your reasons are your reasons.

<<TAX QUESTION: Is there any need to report any of this on our tax returns ?
(Mainly worried about the extra $100/month to pay off the downpayment 'loan').>> might have some problems with the imputed interest rules (as noted in the prior post). But other than that, if this is the way that you decide to handle this issue, nothing else should be required to be reported.

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