I bought my parents a house and put the mortgage in my name, but they pay the mortgage payments. Should I add them to the deed for them to be able to claim the property taxes?

[LauraEL]

My parents have bad credit and limited income. To buy their retirement home, I bought the house and put the mortgage in my name. They make the monthly mortgage payments, though. They need to be able to claim the property/mortgage on their taxes to help keep them low, but the first year we owned the house, I claimed it because my name was obviously on the 1098 form. 

Now I want my parents to be able to claim the mortgage/property to help get them a deduction on their taxes for 2018. Do I need to add them to the deed, or can they claim it even without the form being in their name? This is for the state of Georgia. 

[Carl]

Run it by the lender before you put their names on the deed. More than likely, your mortgage agreement doesn't allow changes to the deed without the lender's written permission. Shouldn't be an issue. But you don't want the house foreclosed on and your credit destroyed because you violated the lending terms.

[LauraEL]

Thanks for the reply! I was hoping you'd weigh in. 🙂 

Can they claim the interest without me adding them to the deed or the mortgage? I'm reading elsewhere that if we can prove they are an equitable owner, perhaps by entering a written agreement, that that would work without having to go through the hassle of adding them to the deed. Do I have that right? 

[Carl]

The only written agreement I'm aware of you can enter into with them on this, is a rental agreement. Anything else risks violating the terms of the mortgage. This is not rocket science. Get the lender's okay to add them to the deed, then do it. That removes all doubt of them having a "vested interest". At worst, the lender will require your parents to sign a document declaring they have no claim to the property should the lender have to foreclose on you. If your credit is as good as you say it is, this shouldn't be a big deal.

[DaveT315]

It sounds like you have a situation where noone can claim the home mortgage interest deduction.   You own the property but you are not making the loan payments so you are not entitled to the home mortgage interest deduction.  Your parents are making the loan payments, but they are not the owners of the property, so they can't claim the home mortgage interest deduction either.  

I have a couple of suggestions for you to discuss with your professional tax advisor.  First scenario:  claim the property as a second home.  Have your parents make the loan payments to you directly and then you make the loan payments to your lender.  You are the owner of the property, the property secures the loan which is in your name, and you alone are liable for the debt.  You are entitled to the home mortgage interest deduction.  You and your parents should treat the money they give you each month as a tax free gift subject to the annual gift tax exclusion.  When the loan is paid off, turn around and gift your parents the property.  Their tax basis will be your tax basis in the property on the date of the gift.  If your parents decide to sell the property, they can use the Section 121 capital gain exclusion on the sale of a primary residence.  

The second scenario is a contract for deed.  Sell your parents the property on a contract for deed.  In this scenario, the loan in your name stays in place and title to the property stays in your name.  You wrap your mortgage with an all-inclusive trust deed that specifies the loan amount, interest rate, and the amount your parents will pay you each month.  When the terms of the contract have been satisfied, you transfer title from your name to your parents.  The IRS treats this arrangement as an installment sale.  Your parents have all the rights and responsibilities of a homeowner and thus, the right to claim the home mortgage interest deduction, but only if they itemize.  Consult a real estate attorney on the mechanics of setting up a contract for deed, establishing an escrow for property taxes if necessary, and then consult with your hazard insurance carrier about putting your parents on your hazard policy as an additional insured.

In light of the new standard deduction changes for tax years 2018 - 2025, the second scenario does not help your parents reduce their tax liability if they can't benefit from itemizing.  

[Carl]

All of DaveT315's suggestions are good and perfectly viable. But based on my personal experience, I just can't resist playing "devil's advocate" here. (No offense Dave!)

When it comes to the "contract for deed" I don't "do business" with family. The two never mix, and there are no exceptions. It really screws up things like Thanksgiving dinner.  I prefer to have thanksgiving dinner with my family, not with my contractor.

Same thing with the rental contract, as I prefer having dinner with family, not my tenants.

But overall, if the bank will not agree to other terms so you can put them on the deed, then the rental agreement would be the lesser of two evils when dealing with family. especially those that raised you and made you the giving person you are today.

[DaveT315]

@Carl,

No offense taken.   However, the problem the original post is trying to solve may no longer exist under the new tax law changes.

The goal was to lower the parents' income tax liability by making them eligible for the home mortgage interest deduction.  What the original poster needs to determine is whether the parents can use the home mortgage interest deduction by itemizing, or, if taking the new increased standard deduction is more advantageous to them.  If they will be taking the standard deduction anyway, then the current arrangement does not need any changes.  If no changes are needed, then I like my first suggestion better than a rental agreement.   

LauraEL's second question asked if there is a way to give her parents an equitable interest in the property without adding them to the deed or the promissory note.  The contract for deed approach addressed that question.  But, again, both questions may be moot if the parents will not benefit from itemizing.

Thanks for your feedback.  Those with life experience often have a different perspective to add to the discussion.