1. Can he claim the mortgage interest at the end of the year?
A: Yes. But he will need to be able to prove in a court of law that he paid it, with his money, should he ever be audited.
2. Do I need to report anything on my taxes? If so, how do I report it? Second home or rental?
A: No. Not if your dad will be paying the mortgage and the property taxes.
3. As an FYI, I can not add him on the deed because he has a current judgement/lien against him in the courts from bad credit almost 10yrs ago and I don't want to take the chance of losing the home. What are my options?
A: Seek legal advice from a lawyer. Depending on the type of debt, the statute of limitations may be long past. Or it may not. But if the debt is still legally collectable and your dad's name is on the deed, then a lein can be placed on the property until the debt is paid in full.
"I've been told that as long as a person as a "vested" interest in the property, ie..they pay for the mortgage, live in it,...etc, they can claim the mortgage interest regardless of who is on the 1098. But how do I treat this scenario on my own tax return?"
You've been informed accurately. That is why if audited, you dad will need to be able to prove in a court of law that he paid the mortgage and the property taxes with his money, that he earned. This is particularly important since your name and SSN will be on the 1098. So your dad needs to obtain and keep ***FOREVER*** any and all receipts in his own name for any and all transactions that occur on this property. THings like receipts for property taxes paid, and mortgage payments. As far as how you treat it on your own tax return, there's nothing to "treat". You are not claiming any deductions for the property, so you have nothing to claim, report, "treat", or anything. To help further your dad's claim should he be audited, I would assume he is going to establish the property as his primary residence.
Do be aware however, that should this property be sold in the future, any and all taxable gain on the property will be taxable to **YOU**, not your dad.
