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newbied
Level 1

I bought a home for my father. I pay the mortgage, and he reimburse me the amount of the mortgage. Do I report this as income?

I purchased a house for my father in 2002.  The mortgage is in my name and he reimburses me for the mortgage payment and takes care of all other expenses and upkeep.  We both consider it his home. He was later added the deed and I will transfer my interest to him when the mortgage is paid off.  I have been reporting it as a rental property all of these years.  With most of the payment now going to principle, it is now showing a profit each year even with depreciation.  Can I convert this to second home and just report the taxes and interest as regular deductions or have him report taxes and interest and not report anything on my returns? The mortgage payments he sends me and in turn are paid to the lender are approximately 14k/yr.  

In summary: 

- I hold the mortgage

- He lives there as his primary residence

- He is on the deed (along with me)

- He covers all expenses (sends mortgage payment to me and I pay the lender)

 

My intention was to help him buy the home since he didn't have good credit but increasingly it is seeming this is going to result in a tax bill if treated as a rental even with depreciation.  My preference would be to treat as a second home and not report it as a rental but I don't want to run afowl by not reporting the mortgage payments as income. Thank you @Carl for you very helpful response to a similar question.  It seems I would be okay to treat as a second home and not report the mortgage reimbursement payments as income but thought I'd double check to make sure I am not missing anything. 

Thanks!

 

 

 

3 Replies
Carl
Level 15

I bought a home for my father. I pay the mortgage, and he reimburse me the amount of the mortgage. Do I report this as income?

Lets talk about the present at "this very instant" in time first. Then we'll backtrack the history.

- I hold the mortgage

- He is on the deed (along with me)

You and your father each are 50% owner of the house. Period. Doesn't matter that only one has a legal liability to pay the mortgage.

- He lives there as his primary residence

Your father has a proven "vested interest" in the property, by it being his primary residence. Technically, he's entitled to claim half the mortgage interest and property taxes if he can prove he actually paid them. He can claim more than half too, if he can prove he paid it. That doesn't negate you from claiming what he doesn't claim.

- He covers all expenses (sends mortgage payment to me and I pay the lender)

Disregarding this statement for now, because things changed on the date you added your dad to the deed.

My intention was to help him buy the home

The IRS doesn't consider intentions. Only facts.

I have been reporting it as a rental property all of these years.

That would be correct, only up until the day you put your dad on the deed.

Any money received from your dad after that date would still be rental income, but things change effective the date your dad was put on the deed. He became 50% owner on that date. Therefore, any money he pays to you is rental income for only 50% of the property. He owns the other 50% and does not pay rent to nayone for that 50%. So while the entire amount of money he paid to you is rental income, it's rental income only for *your* 50% of the property.

This means that for the tax year you put your dad on the deed, the  entry in the assets/depreciation section shows the property as 100% business use. So you would need to amend that return to make the following changes.

1) Convert the property to personal use effective the date his name was placed on the deed.

2) Do a new asset entry for the same property with 50% business use.

The above is not possible with TurboTax because when you enter the 50% business use asset, the program can not "correctly" account for the prior depreciation taken when the property was 100% business use.  So a CPA or other tax professional would have to deal with this for you.

As for converting the entire property from 100% business use as a rental, to personal use, you most certainly can do that. But because your father has a vested interest in the property, he has every right to claim all deductible expenses that he actually pays, and can prove he paid if audited on it.  Understand that when you convert a property back to personal use the only deductible expenses from that point forward are mortgage interest and property taxes. That's it.

With most of the payment now going to principle, it is now showing a profit each year even with depreciation.

So it would appear you have issues with paying taxes on money that you *do* *not* have to lift a finger to earn?  I never could understand that, as you're not the only one I've related this to.

I have a friend who's been running a highly successful and highly profitable business for close to 20 years now. About 12-15 years ago he learned of my involvement with TurboTax, and of my knowledge on taxes. (understand I am not a CPA and have no training/education for this of any type.) So he needed to spend about $20,000 of corporate earnings for the sole purpose of saving $4000 in taxes. Stupidest thing I ever heard. So I told him:

If you give me $20,000 and the IRS insist I give them their cut of $4000, my only question is "who do I make the check out too?" I have no problem with paying 20% taxes on money that I didn't have to lift a finger to earn, and therefore  *I* *GET* *TO* *KEEP*. I'm writing the check and putting that remaining $16,000 in my wallet, where it can never be taxed again. It's a no-brainer.

 

newbied
Level 1

I bought a home for my father. I pay the mortgage, and he reimburse me the amount of the mortgage. Do I report this as income?

Thank you for the feedback, very helpful.

 

The deed was updated in the prior year than the one I am working on.  I will  amend that one as suggested.  Then, I could keep using turbo tax and can either

1) Continue treating as a rental where the depreciation schedule shows 50% business use

2) Remove it from the rental section all together (consider it a second home)

 

If I remove it from the rental section, I am still uncertain if I need to report the payments that he makes for the mortgage as income. Going forward, I am wondering if it makes a difference if he were to pay the mortgage company directly versus going through my account or a shared account. Thanks again for all of your help.

Carl
Level 15

I bought a home for my father. I pay the mortgage, and he reimburse me the amount of the mortgage. Do I report this as income?

1) Continue treating as a rental where the depreciation schedule shows 50% business use

Can't do that with TurboTax. The program just flat out can not "correctly" account for the prior depreciation taken when it was 100% business use. While this option is an option, to correctly report it on your taxes you'll have to seek the services of a CPA.

 

2) Remove it from the rental section all together (consider it a second home)

That's what I would do.

If I remove it from the rental section, I am still uncertain if I need to report the payments that he makes for the mortgage as income. Going forward, I am wondering if it makes a difference if he were to pay the mortgage company directly versus going through my account or a shared account. Thanks again for all of your help.

Your father has a proven "vested interest" in the property. Therefor your father has all legal rights to claim all mortgage interest and property taxes he actually pays. It doesn't matter your dad's name isn't on the mortgage. The lender could care less who makes the payments - so long as they're made, and on time.

Your dad's vested interest in the property by both being on the deed, and the fact it's his primary residence gives him legal right to claim all mortgage interest and property taxes paid. So there's no income for you to claim/report on any tax return that way and you dad gets the tax breaks if any actually exists.

Remember, mortgage interest and property taxes are a SCH A itemized deduction. So until the itemized deductions exceed the standard deduction, they have absolutely no impact on one's tax liability.

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