Hello!
My husband and I just purchased a second home in another state through the Family Opportunity Mortgage incentive for my elderly mother. We put a little over 19% down on the home and will be paying all of the mortgage and taxes. My mother did not provide us with any funds for this property, nor will she be paying any rent.
What kinds of additional tax implications will there be for us in this coming year?
Thank you!
If you itemize your deductions on schedule A, you can deduct all the property taxes you pay on US property, up to the $10,000 cap on all state and local taxes (SALT cap.)
You can deduct mortgage interest that you pay on your main residence and one second home, up to an aggregate total mortgage balance of $750,000. This home can be your second home for the mortgage interest deduction. If you have another vacation home, for example, you will have to choose which home to count as your second home for the interest deduction.
99% of the time, you will not report this as a rental property. This is simply family living in a personal home that you own. You do not need to keep track of any funds provided by your mother to help with household expenses. In order to treat the home as a rental (which might allow you to deduct certain other expenses), you would have to rent the property at a fair market rate — the same rent that a stranger would pay for the same or similar type of property in the same condition in the same or similar neighborhood. There is almost always no tax benefit if you are renting to family members at less than market rate, so it is usually best to just consider that this is your second home, that your mother happens to live in and help with expenses.
Because you closed on the home in 2023, there are certain deductible expenses that may not show up on your regular tax documents. First, you will have paid daily interest to the closing bank from the date of the closing to the end of the month. For example, if you closed on June 28, you would’ve paid two days of interest to the closing bank. This interest is shown on your closing statement. It may not be included in the 1098 that you get from the lender at the end of the year. You may include this interest in your deductible interest even if it is not included on the 1098.
You also may deduct property taxes that cover the period that you own the home, even if you did not directly pay the taxing authority. For example, suppose that in your city, property taxes are paid on February 15 to cover they year from January through December. If you closed on June 28, you would have given the seller a credit for 185 days of property taxes that they paid in advance, and that you are reimbursing them for. Those property taxes are deductible by you even though you did not pay them directly to the city, and even if they are not reported on the 1098 you get from the lender at the end of the year.
Note that, if you paid points to get a lower interest rate, you must deduct those points on a pro-rated basis over the life of the mortgage. For example, if you paid $3000 in points and it's a 30 year mortgage (360 months) you can deduct $8.33 of your points for each monthly mortgage payment you made in 2023. These points may or may not be reported on your 1098. You can't deduct the points all in the first year because this is not your main home.
If the mortgage ends (you refinance the home with a different lender, or pay off the loan, or sell the home and pay off the loan) you can deduct the remaining points in that year. But if you refinance with the same lender, you add the remaining old points to any new points and spread them out over the life of the new loan.