Renters reaping real estate tax benefits?

Couple hopes down payment gift will qualify them

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Aug. 2, 2011

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Couple hopes down payment gift will qualify them

Benny Kass
Inman News™

DEAR BENNY: My husband and I recently filed for bankruptcy after our home was foreclosed. My mother is willing to purchase a home in her name (as an investment property) and rent it back to us, as long as we can come up with the down payment for her purchase. My in-laws have agreed to provide the down payment. The terms of the investment loan do not allow the down payment to come from a third party, so the money needs to be "gifted" to my mother.

Essentially, we would be renting the property back from her. Would there be tax implications to her? Could my husband and I get the tax credit for the mortgage interest and property taxes? --Heidi

DEAR HEIDI: Sorry for your real estate loss, but it sounds like you have a great family to back you up. Your mother's house will be a straight investment. She can deduct for tax purposes the real estate taxes and the mortgage interest she will pay and she should also be able to take depreciation over the years.

Assuming you will be paying her monthly rent, that will be ordinary income to her. Your mother should consult with a tax adviser before she moves forward with the purchase.

As for whether you and your husband can take the interest and tax deductions, the answer is no. Although there are some exceptions, the general rule is "he/she who pays the mortgage -- and is named in the mortgage documents -- gets the deduction."

In order to be able to take these deductions, there must be a deed of trust (or mortgage) actually recorded in the county where the property is located. In your situation, there will be such a recorded document, but it will not be in your names.

DEAR BENNY: I would like to save myself $200 in lawyer fees by changing over the deed to our condo from joint tenancy (my husband and myself) to our living trust. When we purchased the condo four years ago, we failed to place it in our existing living trust although we do have all those papers. It was just carelessness on our part.

I called an attorney here in Illinois who said it would cost $200 plus a filing fee at the recorder of deeds office. He also said I could probably do it myself by going online and downloading the quitclaim form, and then bring it to the recorder of deeds. There are multiple quitclaim forms. Could you advise me step by step how to do this? I am a senior citizen unfamiliar with legalese. --Joanne

DEAR JOANNE: You are correct. If you create a living trust but fail to put your property formally into that trust, you still own the property but the purpose of the trust is nullified.

I appreciate your concern to save some money, but in the long run, it may be money well spent to get professional, legal advice.

However, in some counties, the staff of the local recorder of deeds is helpful. So I suggest that you take your legal documents (the living trust agreement) to the recorder of deeds office in the county where your condo is located and ask if they have a quitclaim form that you can use.

If not, pay the lawyer and have peace of mind.

DEAR BENNY: If I were to sell my house, I could get approximately $75,000 over what I paid for it when I bought it. Can the gains be used against the $60,000 I lost in the stock market? --Kathy

DEAR KATHY: If you sell your house, are you eligible for the up-to-$250,000 exclusion of gain? To be eligible, you have to meet the ownership and use tests -- i.e., you must own and use (i.e., occupy) your house for two years out of the five years before it is sold. If you are married and file a joint tax return, you can exclude up to $500,000 of your profit.

If you are eligible for this exclusion, you can claim only up to $3,000 per year on your $60,000 stock loss. You can, however, carry the remainder forward indefinitely until you have used up the amount of the stock loss.

On the other hand, if you are not eligible for the gain exclusion, then you can offset the capital loss against any profit you will have made on the sale of your house.

But please talk with your own financial adviser about your specific situation.

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