Deductions & credits

No, your arrangement really doesn't "require" anything. But lets look at both sides. The moral side, then the legal side.

The moral side: You own two homes. One is your primary residence, the other is your 2nd home. It's your 2nd home. Straight up. Only you are on the mortgage and only you are on the deed. It's  your house to do with as you please. You chose to take care of those who raised you and gave you the means to be the giving person you obviously are. You're talking care of mom and dad. High fives to ya.

The legal side: Your parents are blood related. This matters on the legal side of this. If what your parents give you in the way of money, regardless of why they give it to you, is less than $14K in any one tax year, that money can be considered a gift from parent to child. Each parent can give you $14K a year for a total of $28K, and nothing has to be reported on any tax return. Ever. What you use that gift for, is your business. Gifts are not taxable so long as said gift is less than a total of $5.2M dollars (yes, that's five point two million dollars).

So if you use that "gift" to make the mortgage payments with, all the mortgage interest and property taxes can still be claimed on your own tax return.

Now is there any reason why you can't add your parents to the deed? There's no law that says you can't. But the terms of your mortgage contract may not allow that. So get that checked out. If you can add your parents to the deed, then they can make the mortgage payments directly and claim that mortgage interest on their own tax return. All that's required for tax purposes is that they have a "vested interest" in the property, and they actually make the payments. The fact they're not on the loan and the 1098 Mortgage Interest Statement is not in their name doesn't matter either. They can still claim the mortgage interest deduction if they 1) Actually pay it, and 2) Have a vested interest in the property.

They "do" have a vested interest in the property right now. But adding their names to the deed further substantiates that claim of interest should it ever be questioned. The only drawback is, if they miss a payment or get behind on payments, with only your name on the mortgage that makes it "your" problem - not theirs.

You can convert the property to rental and claim all the expenses associated with that, as well as what your parents give you as rental income. The problem is that when you are renting property to a relative at below the fair market rental price, then your rental property deductions are limited to your rental income, and you can not carry over the excess to the next year. I figure if all they are paying you in the mortgage payment, then I doubt you're renting them the property at a fair market rental price.  It's below the FMRV so your rental deductions are limited to the rental income and carry overs are not allowed.

I recommend you look into adding your parents to the deed and them let them claim all the mortgage interest and property taxes on their return.

"Upon repayment of the mortgage loan, the home will be transferred into their name."

If you can put their name on the deed, then upon mortgage payoff you just do a quit claim on the deed to remove your name from it.

"If they do not survive that long, we had agreed that the house would be sold, and any profits made would be divided and given to my sisters and me."

You and your parents need a last will and testament *yesterday*. What you all may agree upon and what the law will allow do not always mesh. As it stands right now with only you on the deed, if the parents pass it has no effect on the house at all. If you sell the house, then it's you and you alone that pays any and all taxes on the gain if you sell the house for a profit. Since you are the owner and only owner of the house, it's your 2nd home and therefore will not qualify for the capital gains tax exclusion when you do sell it under the circumstances you outlined above. So you will pay all taxes on any gain, and what you do with the proceeds is up to you.

If your parent's are on the deed with you, then each person has 1/3 ownership in the house with what's called JTWROS (Joint Tenancy With Right Of Survivorship)  So if one of you dies, the other two automatically get that 1/3 equally divided among the surviving two owners. Thus each surviving owner has 1/2 ownership then. If two die, then the remaining owner has 100% ownership. What I'm trying to stress here, is "get your parents on the deed". This makes a huge impact (in a positive way) if you live in a community property state, should one of the parent's pass away first.

 I still can't stress the need for all of you to have a Last Will & Testament though. I've got one because there is no way on this green earth that I'm going to let the government decide who gets what of my estate after I pass.