@uncgdc wrote:
Critter, that's a good point. Initially my sister was going to contribute less than 50%. She recently decided to contribute her full half. Not sure if that matters, and/or if that's why the lender would be recommending she gift me funds. One benefit is that it provides the downpayment for the mortgage, thereby not requiring any add'l funds down from me (which I'd prefer). But I'll bring it up with the lender and see what he says. Thanks
You need to be taking real estate advice from a proper attorney, not the lender, and (to be honest) not from random strangers on an internet bulletin board.
You are possibly committing mortgage fraud. Your sister is buying half the house but you are hiding it from the lender. The fact that the loan salesperson is suggesting this does not mean that the underwriter or the funding agency (Fannie Mae or Freddie Mac) would approve, and that can come back to bite you in the butt later on. (The person who is helping you apply is basically a salesperson. The person with real authority and who is responsible for all the complicated laws and regulations is the underwriter, who won't get involved in reviewing the loan application until a couple weeks before closing.)
It's not a loan from your sister that you are paying back with the house and you don't pay interest to your sister. It is simply that she is buying half the house but you are hiding that from the lender. There is no federal income tax implication but could be other legal implications.
Assuming this transaction actually goes through as you currently plan it, here are the tax implications.
1. You can deduct mortgage interest on the home you live in (your main home) and one second home, as long as you are obligated to the mortgage (it's in your name) and you are the person who pays the interest. If your mother will be living there, this is not your main home but it can count as your second home. If you pay all the interest, you can deduct it all, even if your sister is a co-owner on the deed.
2. You can deduct property taxes you pay as long as you are obligated (the legal owner against whom the tax is assessed). If you pay all the property tax, you can deduct it all, even though your sister is half-owner.
3. Your mortgage interest deduction is limited to $750,000 of acquisition debt. If your own mortgage plus the mortgage on this second (mom's) house totals more than $750,000, your deduction will be capped.
4. Your deduction for state and local taxes (including income tax and property tax) is capped at $10,000 under current law. Depending on the amount of state income tax you pay, and property tax on your other properties, you might not get the full benefit of the property tax deduction for this house.
5. Even though your mortgage interest and property tax deduction might be limited, your sister can't legally deduct taxes or interest (such as the part you can't deduct) unless she also pays part of the taxes and interest.
6. When the house is sold, you will each owe capital gains tax on half the capital gain (increase in value from the purchase price). You can't exclude the gain since neither one of you will live in the home as your main home.
You really should discuss this with a real estate lawyer.
