We purchased home for MIL, need help

[cgb808]

Help me, 

My husband and I ended up purchasing a condo for my MIL because she could not get a loan.  But it is her downpayment and she is paying all expenses.  I was treating it like a rental, bc I was unsure how to treat it--I have done that for 4 years.  Now I would just like to try to add her to the deed and essentially not have it on my tax return.  What do you advise?  What are my next steps on turbo tax in order to make that transition?  It has been haunting me for years, i would just like to clean this up--thank you!  I would appreciate any help!

[SusanY1 · Accepted solution]

You could treat it like a private sale where you hold the mortgage.  In this case for tax purpose you would sell the rental property and then in future years you would list a an "installment sale" in TurboTax where you would claim the interest received and your mother-in-law would deduct the interest paid, if she itemizes deductions on her return.  

Depending on the laws of your state, you may need an attorney to "close" the loan in the sale of the property to her but most of the time that is a relatively inexpensive service.

Getting the advice of an attorney and/or a local tax adviser regarding the consequences of doing it this way before you make the final decision is probably a good idea as well. 

There are tax implications in both the "sale" of the rental property as well as the installment sale that you should fully understand.  None of these are necessarily extreme consequences but exactly what they will be depend a lot on your other income and your overall tax situation. 

There are also some estate planning issues to consider as well.  

[Carl]

If you just don't want to deal with it on your taxes anymore, then you will need to *GIVE* the property to your MIL. (An installment sale will NOT mean you will not continue to deal with the property on your taxes.) You need to seek the services of two professionals in your local jurisdiction - especially if your state taxes personal income.

 - First, a real estate professional to ensure you properly handle the transfer, because what you are "in fact" doing is gifting the property to your MIL.

 - Second, a tax attorney. Not a CPA and not an EA. But a "tax" "ATTORNEY*. You will be required to file IRS Form 709 - Gift Tax Return when you do the transfer. Now don't let the name of that form mislead you. You will *NOT* pay any taxes on your gift. But since your gift will without question exceed $15K, you are required by federal law to report it to the IRS.

As for how your state will treat it and weather or not your state will tax your gift, that's another matter that a tax attorney should be well versed on.

Also be aware that just because you may take your name off the property deed, that doesn't have anything to do with your legally enforceable liability to pay the mortgage. That does not, can not and will not remove you from the mortgage or your legal liability to pay it.

[cgb808]

Thank you for your response.  I do think I will contact a tax attorney.  Is there an option to treat it as a second house and not as a rental?  I don't think I can give the house away because the person can't take the loan as they would not qualify due to their age/not working, etc.  The loan will still have to be in my name so I assume the bank will want the house in my name as well, right?  I feel like it's not a gift since they paid for all expenses from the start.  They have paid for everything.  Does this change anything?  I appreciate your help, I have been so confused as to what to do with this. 

[Carl]

Is there an option to treat it as a second house and not as a rental?

Sure. Work through the rental and towards the beginning select the option for "I converted this property to personal use in 2019". But that's not all.

You also have to work through each individual asset listed in the Assets/Depreciation section and select the option for "I stopped using this asset in 2019". Then on the "Special handling required?" screen you *MUST* select YES. (If you select NO, then you are saying you sold the property and you will be *forced* to enter sales information)

Understand that after converting the property to personal use on your 2019 tax return you will need to print the SCH E, all three IRS Form 4562's associated with that property and the IRS Form 8582 and keep those forms *FOREVER*. They will be needed in the future (I guarantee it) when one of three things happens in your life.

1) You convert the property back to a rental or *any* *other* type of business use.

2) You  sell the property

3) You die.