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Author: 5000fingers Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121095  
Subject: mortgage interest deduction Date: 5/13/2003 10:53 PM
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My GF is buying a condo, and her father is helping her with a down payment. They are hammering out a fair agreement between the two to share the benefits of ownership. I read somewhere that in this kind of arrangement, it is possible to share the interest deduction. Is this true? And if so, how can one person who isn't paying any of the mortgage payments (her father) claim part of the deduction when she is making all of the interest payments?

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65369 of 121095
Subject: Re: mortgage interest deduction Date: 5/14/2003 6:47 AM
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>>My GF is buying a condo, and her father is helping her with a down payment. They are hammering out a fair agreement between the two to share the benefits of ownership. I read somewhere that in this kind of arrangement, it is possible to share the interest deduction. Is this true? And if so, how can one person who isn't paying any of the mortgage payments (her father) claim part of the deduction when she is making all of the interest payments?

He can't. You can't legally deduct what you don't pay. You also can't deduct mortgage interest you DO pay if you are not legally liable for paying the mortgage. So, in order for her father to legally claim a portion of the mortgage interest, his name must appear on the mortgage and he must actually pay something towards the mortgage.

Ira

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Author: Cptbutton Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65370 of 121095
Subject: Re: mortgage interest deduction Date: 5/14/2003 2:51 PM
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He can't. You can't legally deduct what you don't pay. You also can't deduct mortgage interest you DO pay if you are not legally liable for paying the mortgage. So, in order for her father to legally claim a portion of the mortgage interest, his name must appear on the mortgage and he must actually pay something towards the mortgage

Could the second part be satisfied by having a joint checking account used to pay the mortgage, even if the daughter did all the depositing and check writing?

-CB


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Author: wtam Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65371 of 121095
Subject: Re: mortgage interest deduction Date: 5/14/2003 2:54 PM
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i believe the test is to be deductible home mortgage interest, you must be legally liable for repayment of the loan - i.e., your name must be on the mortgage or home equity loan agreement. simply paying out of a joint accout won't cut it.

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Author: Cptbutton Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65372 of 121095
Subject: Re: mortgage interest deduction Date: 5/14/2003 2:57 PM
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i believe the test is to be deductible home mortgage interest, you must be legally liable for repayment of the loan - i.e., your name must be on the mortgage or home equity loan agreement. simply paying out of a joint accout won't cut it.

Shouldn't you read messages before you reply to them?

*plonk*

-CB


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Author: wtam Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65373 of 121095
Subject: Re: mortgage interest deduction Date: 5/14/2003 3:11 PM
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well, since my first reply wasn't clear enough for your standards...

NO.

how's that?



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Author: wtam Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65374 of 121095
Subject: Re: mortgage interest deduction Date: 5/14/2003 3:15 PM
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if it came down to an audit, the IRS would look at the actual source of the funds (her deposits) and uses (she wrote the checks). That it was technically passed through a joint account would not matter, even to satisfy the "second part"


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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65375 of 121095
Subject: Re: mortgage interest deduction Date: 5/14/2003 5:12 PM
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if it came down to an audit, the IRS would look at the actual source of the funds (her deposits) and uses (she wrote the checks). That it was technically passed through a joint account would not matter, even to satisfy the "second part"

I concur.

Ira


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Author: Mark0Young Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65377 of 121095
Subject: Re: mortgage interest deduction Date: 5/15/2003 2:45 PM
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My GF is buying a condo, and her father is helping her with a down payment. They are hammering out a fair agreement between the two to share the benefits of ownership. I read somewhere that in this kind of arrangement, it is possible to share the interest deduction. Is this true? And if so, how can one person who isn't paying any of the mortgage payments (her father) claim part of the deduction when she is making all of the interest payments?


Sometimes it helps to go back to the authoratative source--in this case, the IRS.

Publication 936: Home Mortgage Interest Deduction http://www.irs.gov/pub/irs-pdf/p936.pdf

Straight from Publication 936:

You can deduct home mortgage interest only
if you meet all the following conditions.

• You must file Form 1040 and itemize
deductions on Schedule A (Form 1040).

You must be legally liable for the loan.
You cannot deduct payments you make
for someone else if you are not legally
liable to make them.
Both you and the
lender must intend that the loan be repaid.
In addition, there must be a true
debtor-creditor relationship between you
and the lender.


• The mortgage must be a secured debt on
a qualified home. “Secured debt” and
“qualified home” are explained later.

I have attempted to bold the text where my reading of the publication suggests that the home interest deduction cannot be taken by the GF's father. It might not show up in the quoted text so this is a repeat of where I think the plan will fall apart:

- You must be legally liable for the loan. You cannot deduct payments you make for someone else if you are not legally liable to make them. ... In addition, there must be a true debtor-creditor relationship between you and the lender. GF's father isn't legally bound to make payments on the mortgage unless his name is also on the mortgage. However, that usually makes the parties separately and fully obligated to make the payments, i.e., the mortgage will show up on both the GF's credit report and her father's credit report, and if the GF defaults or is late, her father's credit report will also show that negative activity. (Yes, this would make her father a cosigner to the mortgage.)

- qualified home. This would imply that GF's father had ownership interest in the home. If the condo is in the GF's name only, I don't see how this would qualify as her father's second home. (Even the property tax deduction is limited to taxes on property one owns.)

I would definitely recommend having both the GF and her father chat with a tax professional if they are seriously considering ways of making the GF's condo qualify as her father's "second home"--this is something one would have to tread carefully because my suspicion is that this will become audit bait.



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Author: lorenzo2 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65381 of 121095
Subject: Re: mortgage interest deduction Date: 5/15/2003 4:35 PM
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My GF is buying a condo, and her father is helping her with a down payment. They are hammering out a fair agreement between the two to share the benefits of ownership.

Everyone is making this way too complicated. As Ira and others have noted, father cannot take mortgage interest deduction in the situation as stated. End of story. However, there's an obvious thing that GF and father can do, and that's for GF to reimburse father the amount that he would save on taxes if he could take interest deduction.

That is, suppose GF pays total of $6000 in interest, and what they'd like to do is give father the tax benefit of half that. If father is in, say, the 35% tax bracket, then she needs to give him 35% of $3000, or $1050. That leaves father exactly as he would be if he could claim $3000 in interest. Even though GF gets to claim the entire $6000 deduction, she's a little worse off unless she's also in the 35% bracket. (Assuming she's in a lower bracket, the extra $3000 she's getting isn't worth quite as much as it would be to father, in a higher bracket...)

Lorenzo

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65382 of 121095
Subject: Re: mortgage interest deduction Date: 5/15/2003 5:39 PM
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You stated that they are working out an agreement to share 'the benefits of ownership'. The benefits and risks of ownership extend beyond interest and tax deductions. If they are considering equity sharing then his name might be on the title. She would not have full control over the property and he would need liability coverage. The agreement needs to cover issues such as marriage or death.

Have they considered the simple arrangement of him holding a second mortgage on the condo and agree on the repayment terms? If the problem is not that she does not have the downpayment but is attempting to buy property she cannot afford then a loan probably would not work.

There are 100% loan packages available that do not require PMI.


Debra



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Author: catscanner Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65384 of 121095
Subject: Re: mortgage interest deduction Date: 5/16/2003 12:09 AM
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......If father is in, say, the 35% tax bracket, then she needs to give him 35% of $3000, or $1050.........
---------
This tax bracket thing still bothers me. We all try to easily clasiify out tax bracket as 10%, 15%, 35% etc. when in reality our tax bracket is only the starting point before any deductions and credits. By the time you actually "pay" your taxes, your "effective" rate most probably will be significantly lower.

cat

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Author: lorenzo2 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65385 of 121095
Subject: Re: mortgage interest deduction Date: 5/16/2003 12:34 AM
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This tax bracket thing still bothers me. We all try to easily clasiify out tax bracket as 10%, 15%, 35% etc. when in reality our tax bracket is only the starting point before any deductions and credits. By the time you actually "pay" your taxes, your "effective" rate most probably will be significantly lower.

I wouldn't say it's the starting point - it's more like the ending point. When I refer to your tax bracket, I'm talking about the bracket into which your taxable income falls - that is, after exemptions and deductions are subtracted from gross income. (Credits come along later, of course.) And yes, effective rate is lower, except for those in the lowest bracket. Many people don't seem to understand that "tax bracket" refers to what you pay on your last dollar of income. You may be in the 30% bracket, but you still have large chunks of income taxed at 10%, 15%, and 27%.

Lorenzo

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65386 of 121095
Subject: Re: mortgage interest deduction Date: 5/16/2003 8:17 AM
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catscanner: This tax bracket thing still bothers me. We all try to easily clasiify out tax bracket as 10%, 15%, 35% etc. when in reality our tax bracket is only the starting point before any deductions and credits. By the time you actually "pay" your taxes, your "effective" rate most probably will be significantly lower.

Lorenzo2: I wouldn't say it's the starting point - it's more like the ending point. When I refer to your tax bracket, I'm talking about the bracket into which your taxable income falls - that is, after exemptions and deductions are subtracted from gross income. (Credits come along later, of course.) And yes, effective rate is lower, except for those in the lowest bracket. Many people don't seem to understand that "tax bracket" refers to what you pay on your last dollar of income. You may be in the 30% bracket, but you still have large chunks of income taxed at 10%, 15%, and 27%.

me: Actually there's truth in both positions. Lorenzo is correct that you should be looking at the effect of the last dollar on tax liability. Unfortunately, with the current complexity of the tax rules, what with phase-ins and phase-outs and interactions between certain credits and deductions, you can't really discuss a tax bracket at all. Even if your taxable income puts you within, aay, the 30% bracket, adding $100 of income above line 22 will not necessarily produce $30 of additional tax. (I am ignoring the effect of the tax table $50 bands.)

Ira



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Author: FoolStreet Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65387 of 121095
Subject: Re: mortgage interest deduction Date: 5/16/2003 12:17 PM
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You definitely can.

http://www.msullivan.com/equitysharing.html

I think it's well worth the $25 to buy her book and read it. It's really good.

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Author: FoolStreet Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65388 of 121095
Subject: Re: mortgage interest deduction Date: 5/16/2003 12:23 PM
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the tax board folks just haven't seen this.


the basic gist is as follows:

sis and pops split the % owned. they go on title this way.

pops pays for expenses like insurance and HOA, which are expenses to him and he gets to write them off.

sis pays for the mortgage (which is in her name) and gets to write off mortgage interest. she will also need to pay rent to pops in exchange for living in his 20% interest in the property. it usually works out well enough that her rent is enough for him to pay the expenses like insurance and HOA.

Very tidy agreement. Of course, pops is an investor and expects an ROI on his investment and after a set period, sis has to buy him out at that expected ROI rate.

HOWEVER, this is where estate planning comes in. He's more than able to gift his % ownership to sis any time he wants.

Look, it's probably black diamond, but it's definitely on the up and up. no fraud involved. see my other post and buy her book. if after reading it, you don't understand or don't want to be bothered, then there you have it...

:-)

good luck. sounds kinda fun to me.

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65389 of 121095
Subject: Re: mortgage interest deduction Date: 5/16/2003 1:45 PM
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FoolStreet:

"the tax board folks just haven't seen this.

the basic gist is as follows:

sis and pops split the % owned. they go on title this way.

pops pays for expenses like insurance and HOA, which are expenses to him and he gets to write them off.

sis pays for the mortgage (which is in her name) and gets to write off mortgage interest. she will also need to pay rent to pops in exchange for living in his 20% interest in the property. it usually works out well enough that her rent is enough for him to pay the expenses like insurance and HOA.

Very tidy agreement. Of course, pops is an investor and expects an ROI on his investment and after a set period, sis has to buy him out at that expected ROI rate.

HOWEVER, this is where estate planning comes in. He's more than able to gift his % ownership to sis any time he wants.

Look, it's probably black diamond, but it's definitely on the up and up. no fraud involved. see my other post and buy her book. if after reading it, you don't understand or don't want to be bothered, then there you have it..."


The equity sharing agreement is, in all likelihood, simply a partnership agreement. I am sure the resident pros are familiar with those. If a partnership is not created, then it is simply an agreement between co-owners and mostly a matter of contract. As a general rule, one co-owner does not need to pay rent to another co-owner for occupying the real estate, and any co-owner can force a sale unless the property is easily partioned.

Regards, JAFO



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Author: FoolStreet Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65390 of 121095
Subject: Re: mortgage interest deduction Date: 5/16/2003 2:02 PM
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The equity sharing agreement is, in all likelihood, simply a partnership agreement. I am sure the resident pros are familiar with those. If a partnership is not created, then it is simply an agreement between co-owners and mostly a matter of contract. As a general rule, one co-owner does not need to pay rent to another co-owner for occupying the real estate, and any co-owner can force a sale unless the property is easily partioned.

Regards, JAFO


I didn't mean to come off like "i know better." the locals rock and i owe them tons. i only meant that they wouldn't be familiar w/ this particular flavor. And of course, there are many ways to skin a cat...


as far as the rent payment requirement, there is some tax law requiring it somewhere (or else the co-owner wouldn't be able to write off the expenses as rental expenses)

i can check the book if people are interested when I get home. ...but if noone is interested, i'll leave it as an excercise to the reader ;-)



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Author: malibu114 Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65406 of 121095
Subject: Re: mortgage interest deduction Date: 5/19/2003 2:19 PM
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He can't. You can't legally deduct what you don't pay. You also can't deduct mortgage interest you DO pay if you are not legally liable for paying the mortgage. So, in order for her father to legally claim a portion of the mortgage interest, his name must appear on the mortgage and he must actually pay something towards the mortgage.

Okay, I just want a little more clarification, since I'm sort of in a similar position. I'm buying a two family house with my parents and they are paying for their half of the house in cash. We are taking out a mortgage for my half, and I'm going to be the one paying for the mortgage, even though their names will be on it too. Does this mean I can claim the entire interest deduction?

Another similar question, what about the property taxes? Even though the taxes will be included in my mortgage payments, my parents will be giving me $290 a month to cover their half of the taxes. Shouldn't they be able to claim 1/2 of the proprty taxes on their income tax return.

Donna


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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65408 of 121095
Subject: Re: mortgage interest deduction Date: 5/19/2003 4:15 PM
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Okay, I just want a little more clarification, since I'm sort of in a similar position. I'm buying a two family house with my parents and they are paying for their half of the house in cash. We are taking out a mortgage for my half, and I'm going to be the one paying for the mortgage, even though their names will be on it too. Does this mean I can claim the entire interest deduction?

Another similar question, what about the property taxes? Even though the taxes will be included in my mortgage payments, my parents will be giving me $290 a month to cover their half of the taxes. Shouldn't they be able to claim 1/2 of the proprty taxes on their income tax return.


Ok... you're buying a two family home with your parents. You will live in one half, they will live in the other. If both names are on the deed, both can potentially deduct the real estate taxes. If both names are on the mortgage, both can potentially deduct the mortgage interest.

In order to claim the deduction, you must be legally liable for the payment and make the payment. You will be paying the mortgage, so you can deduct the mortgage interest. To the extent that $290/month represents their appropriate share of the real estate taxes, I would (have them) take the deduction. The fact that you are the conduit for their payment is immaterial.

Ira


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