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Level 1

I bought a home for my parents, and everything is in my name. I pay the mortgage, and they reimburse me the amount of the mortgage. Do I have to claim this as income?

I provided the 20% down payment on the home, and financed everything in my name, because they couldn't.   They were also unable to qualify for the mortgage in terms of credit, and they were fearful that the home they were renting at the time was going to see an increase in rent amount.   

Other than having the deed and mortgage loan in my name, they live their like its their own.  They pay for any improvements in the house and we do not have a rental contract.    Upon repayment of the mortgage loan, the home will be transferred into their name.   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.

Does this arrangement require that I claim the mortgage payments as income? While I am not netting anything, I'm not sure how uncle Sam will view this arrangement.  

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Level 20

I bought a home for my parents, and everything is in my name. I pay the mortgage, and they reimburse me the amount of the mortgage. Do I have to claim this as income?

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.

5 Replies
Level 20

I bought a home for my parents, and everything is in my name. I pay the mortgage, and they reimburse me the amount of the mortgage. Do I have to claim this as income?

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.

Level 1

I bought a home for my parents, and everything is in my name. I pay the mortgage, and they reimburse me the amount of the mortgage. Do I have to claim this as income?

Thank you for the feedback.  Everything being in my name was intentional.   They have some other outstanding debt to another family member that has a high likelihood of resulting in a lien placed on the house if it legally becomes their asset.   I understand the responsibility is mine should they ever fail to make a payment.  Although it wouldn't make me happy, that scenario was considered when we budgeted for the home and is a risk that I am willing to accept should it come to that.   Treating it as a second home and the income as gift might make the most sense.   The mortgage amount is well below 14K.

The mortgage amount and low interest rate is very small, and its very unlikely their itemized deductions would be more than the standard deduction, so I'm not sure the mortgage interest is worth getting them on the deed and risking a lien.

I agree about the Last Will & Testament, and I have been considering  even before this home was a factor.  I am married, so my wife's name is on all the paperwork as well, which I should have mentioned, but don't believe it changes the options in this scenario.

Thanks again, this was very helpful.
Level 20

I bought a home for my parents, and everything is in my name. I pay the mortgage, and they reimburse me the amount of the mortgage. Do I have to claim this as income?

Technically (and legally) you can convert it to rental and get quite a bit in deductible expenses that, while the rental income would be reportable, the deductions of Mortgage Interest, property taxes, property insurance, depreciation and other expenses would negate the taxability of the reported income. Basically, since rental income is passive, the taxability of that passive income can only be offset by the passive losses (rental expenses). It's quite common for the losses to exceed the income every year, and those losses increase each year as they are carried over to the next. But your issue is, since renting to a relative at below FMRV, you can't carry over losses.

Then when the property is sold in the future all that prior years of depreciation has to be recaptured and it's taxed in the year you sell the property.  So with the depreciation recapture, a property purchased for $100,000 will have about $20K of depreciation over 10 years. So if you sell the property for $150K in 10 years, you have more than a $50K gain. With the recaptured depreciation you actually have a $70K gain. It's taxable, and that gain combined with all your other income will most likely put you in a higher tax bracket.

In the year you sell, all carry over losses are "realized" and can help reduce the amount of taxable gain. But since you would be renting to a blood relative at below FMRV, you wouldn't have any carry over losses to help reduce that taxable gain. So you'd pay taxes on the full gain, as well as on the recaptured depreciation.

So based on your specific situation I would recommend you not convert it to rental, treat it as a 2nd home, and consider any money received from mom and dad t be a gift, and make sure the amount of that gift does not exceed $14K from each parent, for each tax year.
Level 1

I bought a home for my parents, and everything is in my name. I pay the mortgage, and they reimburse me the amount of the mortgage. Do I have to claim this as income?

Thanks for this wonderful  topic.   I am in the same exact situation ... so while you advise on this being considered as 2nd home, can I deduct the prop. tax and the mortgage interest on 2nd home ?   shouldn't second home be certain miles away from primary, etc. ??? Do they still apply ?   how do these deductions work ?  (you owning a 2nd home that is not rental and not your primary?)  thanks.
Level 20

I bought a home for my parents, and everything is in my name. I pay the mortgage, and they reimburse me the amount of the mortgage. Do I have to claim this as income?

On a 2nd home, you can only claim/deduct property taxes and mortgage interest. That's it. But keep in mind that effective with your 2018 taxes, the amount of mortgage interest you can deduct is limited to the first $750K of the outstanding mortgage balance on all homes you own that are not business use. (Rental property is business use). For a non-business use home, the insurance is not deductible and never has been.
On rental property you can deduct mortgage interest (no limit either), property taxes, insurance, cost of repairs and maintenance, and if you the landlord pay the utilities for that rental, that can be deducted against the rental income too.
One thing to note here is that rental income is passive. Therefore rental expenses are also passive. So rental expenses can only be deducted from rental income. Once those expenses get the passive income to zero, that's it. Excess expenses are carried over to the next year. It's very common for the carry overs to increase year to year too. But you will realize those losses in the year you sell the property.
Additionally, on rental property you are required by law to depreciate the property over 27.5 years. Then in the year you sell, that depreciation is recaptured and taxed. For most, the carry over losses will significantly offset that recapture, if not eliminate it entirely.