I refinanced my dad's loan under my name. He pays the mortgage and the HOA fees. Do I have to claim this as income?

[planningforthefuture]

My dad bought his house in 1988. I was added to the deed in 2018. In 2021, he got into a bind and was unable to qualify for a refinance so I refinanced the loan under my name. His name is no longer on the loan, but we both are still on the deed. There was no sale generated in this transaction. He was paying the mortgage and HOA fees from his bank account, but when I was in the process of purchasing my main home, the bank wanted a residential lease agreement and him to pay me directly so I could qualify for the loan. He now pays me every month for the mortgage and HOA fees and then I submit the payments. All utilities, repairs, and maintenance he pays on his own. Should I be filing a Schedule E for 2021? He is older and I have been thinking a lot about his estate. Should he pass away, would I be able to sell the house or would it be apart of his estate? Would my basis be his basis or would I get a step up basis during the year I was added to the deed? Also, if I try to refinance down the road, would the bank want to see this property as a Schedule E on my taxes to qualify?

[Mike9241]

you have many questions. some that are not income tax-related. for the best advice, I would suggest using an estate attorney.  you being on the title could result in you having to pay taxes when the property is sold because only your dad's portion, whatever that is, would get a date of death value.  since you apparently don't live in the house, you would not qualify for the home sale exclusion.   even though your dad's not on the mortgage, I believe he would be deemed an equitable owner and thus be the one entitled to deduct the mortgage interest.  (IRS REG 1.163-1)

as to whether if you refi a bank would want to see schedule E, that's a question only the bank can answer

as to you have schedule E reporting requirements.  can't say for sure. there are issues. one there is a formal lease between you and your dad and you do own at least part of the property.  however, is the "rent" you are collecting fair rental value (for the part you own)?  if the rent is below fair market value, then under the tax laws it would be treated as a personal residence. no rental income or expense should be reported for federal tax purposes.

If you are charging Fair Rental, I'm not sure how the IRS would view it.  

[fanfare]

[removed by me]

[Critter-3]

First loans are NOT income so it doesn't need to be reported on an INCOME tax return.   

Next the deduction of the interest payments ... if he makes the payments then dad can claim them even if he is not on the loan since he does own the home ... expect push back from the IRS since he is not on the 1098 form.  

And last ... I fully agree ... talk to an attorney to get this situation clarified and the proper paperwork set up.  If dad did not do a gift tax return when he put you on the deed that needs to be corrected.  And some sort of life estate may need to be set up as well as other considerations.  Better to be educated and prepared for the worst while hoping for the best. 

[Opus 17]

No, this is not a rental situation with schedule E.  Whoever pays the expenses can deduct the expenses.  (HOA fees are not deductible in any case.)  The IRS regulations state that only the mortgage borrower can deduct the mortgage interest, but your father clearly has an "equitable interest" in the home as a co-owner, so if it came to an audit or a tax court case, your father would win.  But the IRS might send him a letter asking for more information if he declares mortgage interest if the 1098 is in someone else's name.   He would reply to such a letter by describing the situation, stating that he is an equitable owner, and giving your name and address and declaring that you are not also deducting the same interest.

Regarding death and estates, see an estate planner.  There's a lot that can happen here, and a lot that can go wrong.  You might want to place the home in a trust, for example, to protect it from long term medical expenses.  It also matters a great deal if you live in the home with your father or are living somewhere else.  An estate planner can analyze the situation and give you options. 

[Carl]

The only thing I disagree with is the rental stuff.

Since you do have a formal rental contract with your dad, you are legally a landlord and are basically renting out "your half" of the property to your father. The fact there's a blood relation there really doesn't matter. I bet the bank has a copy of the lease agreement also, which they may have required you to provide as proof of "your" income as the sole borrower on the loan.

You would report the rental income received on SCH E and when setting it up indicate that you are 50% owner, and that you rent out your 50% for whatever amount your dad gives you.  You'll also have to set up depreciation in the program, so that only 50% of the structure value gets depreciated.

Things may "seem" further complicated since the property is not "your" primary residence. But it's really not. There are several ways to set this up in the TTX program, and each has it's pros and cons.

Talking to legal counsel is still highly advised before you do anything though. I would suggest an estate attorney and a tax attorney/professional at a minimum. Here's why.

You stated, "I was added to the deed in 2018."

So unless implicitly stated in some legal document somewhere, your ownership percentage in the property is 50%. Additionally, your dad gifted you 50% of the property. More than likely that 50% had a value well in excess of $15,000 back in 2018. Therefore your dad (the giver of the gift) was required to file IRS Form 709 - Gift Tax Return with the IRS. Don't let the name of that form fool you. NO TAXES WILL BE PAID on the gift by either the giver or the recipient if the value of the gift given was less than $11,2M. It's merely a reporting requirement, and that's all.

Another thing is, when you received the gift, you also received his original cost basis on that gift. So if your dad paid $50,000 for the house when he purchased it in 1990 and it was worth more than that when gifted to you in 2018, your original cost basis on your half is $25,000. When your dad passes and you inherit his half, you only get to step up the basis on his half - not the entire property. This is one reason to talk to an estate attorney/planner. They can do things such as a living trust which can be done in such a way as to allow you to get the increase in cost basis for the entire property when he passes.

[Opus 17]

@Carl 

If father and son co-own the house and rented it to a stranger, don’t they each report half of the rent and expenses on schedule E?  How does that work then in the father is also the tenant? You can’t rent to yourself and deduct expenses that would ordinarily be non-deductible personal expenses like insurance. 

[Carl]

If father and son co-own the house and rented it to a stranger, don’t they each report half of the rent and expenses on schedule E?

Yes, but it may not necessarily be half. Each reports what they actually pay, and what they actually receive. Generally, it's an even split.

How does that work then in the father is also the tenant?

The son's name is also on the deed. So unless clarified somewhere in some other legally acceptable/binding document, the son owns 50%.

You can’t rent to yourself and deduct expenses that would ordinarily be non-deductible personal expenses like insurance.

There's a rental contract involved here, which I would assume is legally binding. Were it not legally binding, I'm sure the bank would not have accepted it as proof of income. The son should (must I say) report that income for what it is. This is why they "NEED" to talk to legal counsel. I didn't mention it before, because I'm no legal expert. But I wonder if they can just forgo the SCH E and the son just report the income as "other" income on SCH 1 line 8i - Activity Not Engaged In For Profit, which would then end up on line 8 of the 1040. In my opinion (and we all know what opinions are like) that would be the way to go. But again, I'm no legal expert.

[Opus 17]

@Carl 

To put it bluntly, the father is renting to himself.  Especially if, as said, the father is paying all the expenses except for the mortgage and HOA fees.  

I can’t comment as to the propriety of the refinance (who claimed what to whom) as far as banking laws are concerned, but having the owners renting to themselves seems improper as far as the IRS would be concerned.