My parents co-signed for my mortgage and pay me $1500 per month to help me pay mortgage. That’s less than half, but Dad claims half my mortgage tax deduction.?

[laurie5553]

I’m getting roommates to help me cover my expenses and claiming rental income will already offset my mortgage interest tax deduction.  ?

[Opus 17]

To deduct mortgage interest, the taxpayer must be a person who is obligated to pay interest (by being named on the mortgage) and be a person who actually pays interest.  The deduction is limited to the amount of interest they pay.

However, note that property taxes may only be deducted by someone against whom the taxes are assessed, and be the person who pays the taxes.  Generally, your father won't be able to deduct property taxes unless his name is on the deed of the home as co-owner, as well as paying part of the mortgage payment.

Now, there may be some leeway in how you divide up the finances.  Suppose the mortgage payment is $4000 per month.  That might be $3000 for interest, $600 for property taxes and insurance (escrow items), and $400 to reduce the principal.  In that case, it would be possible to say that your father is paying half the interest, but is not paying toward the taxes or principal.  (Remember that even if your father covered the entire mortgage payment, he can't deduct the taxes unless he is on the deed, not just a co-signer.)

Ultimately, is the extra deduction he might be claiming, worth fighting over and risking the house?

[TomD8]

If your parents don't have an ownership interest in the home (meaning their name(s) are on the deed, not just on the loan), then they can't deduct either the property taxes or the mortgage interest.

To qualify for the mortgage interest deduction, a taxpayer must have an ownership interest in the home.

https://www.irs.gov/publications/p936

The fact that they co-signed for the mortgage does not by itself qualify them to take the mortgage interest or property tax deduction.

If their name is on the deed, they can deduct the portion of the mortgage interest & property tax that they actually pay.

[VolvoGirl]

And if he is paying it to you and not directly to the mortgage I don't think that counts for anything.   That would just be a gift to you.  And then you pay the mortgage and get the deductions.   And there is a limit on gifts.  He may need to file a gift tax return. 

[TomD8]

@VolvoGirl --

Since the parents co-signed for the mortgage, I don't believe their payments would be construed as a gift. 

If the mortgage were only in the daughter's name, then any mortgage payments the parents made would definitely be considered a gift.

[tagteam]

Except a co-signer has no legal liability on a note unless and until there is a default.

As a result, I believe the payments could be construed as gifts.

[Opus 17]

@tagteam 

@TomD8 

Although publication 936 lists a requirement that the mortgage holder must be a legal owner and obligated on the mortgage, I do not believe that is in the actual tax code.  I believe that the tax code itself only requires that the taxpayer be a borrower.  

On the other hand, I have never before considered the concept that a cosigner might not be a borrower if the note is not in default.   I don’t know how to resolve that question, maybe professional tax advice is warranted.

[TomD8 · Accepted solution]

@Opus 17 --

26 U.S. Code 163 (g)(3) (A)(i) - the law governing deductible interest - states that "qualified residence interest" is interest "paid or accrued during the tax year on acquisition interest with respect to any qualified residence of the taxpayer."

26 U.S. Code § 163 - Interest | U.S. Code | US Law | LII / Legal Information Institute (cornell.edu)

Hence the "ownership interest " phrasing in Publication 936.

In this particular thread, the home in question is clearly not a qualified residence of the parents.

[tagteam]

---

@Opus 17 wrote:

....I have never before considered the concept that a cosigner might not be a borrower if the note is not in default.   I don’t know how to resolve that question.....

---

I do know how to resolve it: A co-signer has secondary liability, not primary, and is not a borrower.

Also, with respect to the gift issue, the position, if accepted, that the payments are not a gift would just be an absolutely outstanding way to totally defeat the gift and estate tax (if you stop and think about it).

EX: Multi-Billionaire Bill co-signs a loan in the amount of $5,000,000,000 for his daughter, who is the primary borrower. Bill then proceeds to make payments to his daughter of $20,000,000 per month, free of any and all gift tax. 

[TomD8]

@tagteam wrote: "Except a co-signer has no legal liability on a note unless and until there is a default."

Good - and valid - point.

[laurie5553]

Thanks. I am just trying to get it all straightened out because I'm getting roommates. 

[laurie5553]

yes they are on the title too

[laurie5553]

See, it's not so cut and dried. I've been reading several articles and one of them, an article from thetaxadvisor.com said that if they don't actually live in the home, they cannot claim the whole mortgage interest deduction. 

Taxes are always so complex!

[laurie5553]

Good point. Part of the legal concept of ownership/taxation/liability is that if they have to pay the taxes (or the mortgage) in order to protect their own potential loss, in the case of say defaulting on the property, then they should be entitled to the mortgage interest deduction. Or was that just the tax portion? I can't remember. 

[laurie5553]

Why wouldn't they have equal liability?