One person on Mortgage but 3 people on Warranty Deed and/or Title?

[olucy]

What is the name of your state (only U.S. law)? Texas
I am helping buy a house for my daughter/son-in-law. They are moving from out-of-state so have given notice at their current jobs and will be looking for work here in Texas. For mortgage paperwork and at time of closing they will be technically unemployed. We started off as my being only a co-borrower but with them unemployed it was changed so I am financing the mortgage based only on my financials as an investment property. They will pay the monthly mortgage payment and the annual taxes and insurance and everything else. In other words, this is their house I am only doing the mortgage so Lender will approve. Mortgage guy is telling me "You are the only one that will be on the loan, but they can be on the title of the home-no problem". Local Country/Property tax office says daughter/son-in-law will get Homestead exemption as long as their names are on the Warranty Deed. I can't get any info from the IRS. My questions are: 1) daughter/son-in-law are to claim the mortgage interest deduction for IRS taxes each year--not me. Can they do this being only on the Title or must they be on Warranty Deed or on the Mortgage itself? 2) Difference between Title and Warranty Deed? and how this protects me if they want to sell but I don't want to sell? Thanks in advance!

 

[justalayman]

first, the deed is the mechanism used to transfer interest in the property from one person to another.


title is the cumulative history of all deeds and other matters that affect the ownership of the property.



as to not being able to get info from the IRS:

http://www.irs.gov/publications/p936/ar02.html



a

nd how this protects me if they want to sell but I don't want to sell?

If you are the only person in title, it is your property and you can sell it if you want to. If all 3 are in title, each will hold an individual share and all any one of them can sell is their share. If they can find a buyer for their share, they could sell their share. Otherwise, if one wants to sell and the others don't, that one person could file a suit to partition the asset. Otherwise it would take the agreement of all parties in title to sell the property.

 

[tranquility]

What is the name of your state (only U.S. law)? Texas
I am helping buy a house for my daughter/son-in-law. They are moving from out-of-state so have given notice at their current jobs and will be looking for work here in Texas. For mortgage paperwork and at time of closing they will be technically unemployed. We started off as my being only a co-borrower but with them unemployed it was changed so I am financing the mortgage based only on my financials as an investment property. They will pay the monthly mortgage payment and the annual taxes and insurance and everything else. In other words, this is their house I am only doing the mortgage so Lender will approve. Mortgage guy is telling me "You are the only one that will be on the loan, but they can be on the title of the home-no problem". Local Country/Property tax office says daughter/son-in-law will get Homestead exemption as long as their names are on the Warranty Deed. I can't get any info from the IRS. My questions are: 1) daughter/son-in-law are to claim the mortgage interest deduction for IRS taxes each year--not me. Can they do this being only on the Title or must they be on Warranty Deed or on the Mortgage itself? 2) Difference between Title and Warranty Deed? and how this protects me if they want to sell but I don't want to sell? Thanks in advance!

Let me start by saying you do not want to be the only one on the mortgage with them on title. Bad things may result. Very bad things.

To the questions, #1 is a little tricky. There can be an argument they are the owners of the property and the property will be taken if the mortgage is not paid so they are "responsible" for the mortgage. There is some precedent for the argument, but do you really want to be looking at case law to deal with the IRS? Besides, since you are on title in your plan, the case law might be distinguished.

#2 If any of the owners want to sell, they can force a sale of the whole property by partition suit. They are expensive and take a long time. Any owner can sell his share if someone is willing to buy it.

 

[davew128]

To the questions, #1 is a little tricky. There can be an argument they are the owners of the property and the property will be taken if the mortgage is not paid so they are "responsible" for the mortgage. There is some precedent for the argument, but do you really want to be looking at case law to deal with the IRS? Besides, since you are on title in your plan, the case law might be distinguished.

In this instance the IRS is 0-2 in tax court on the issue and hasn't appealed to a circuit court, mostly because they really don't have an argument. I don't like these situations because it creates the potential for a lot of unnecessary scrutiny that results in no change, but from a compliance standpoint I wouldn't have any reservation with taking the deduction for the children provided they pay the mortgage.

 

[LdiJ]

What is the name of your state (only U.S. law)? Texas
I am helping buy a house for my daughter/son-in-law. They are moving from out-of-state so have given notice at their current jobs and will be looking for work here in Texas. For mortgage paperwork and at time of closing they will be technically unemployed. We started off as my being only a co-borrower but with them unemployed it was changed so I am financing the mortgage based only on my financials as an investment property. They will pay the monthly mortgage payment and the annual taxes and insurance and everything else. In other words, this is their house I am only doing the mortgage so Lender will approve. Mortgage guy is telling me "You are the only one that will be on the loan, but they can be on the title of the home-no problem". Local Country/Property tax office says daughter/son-in-law will get Homestead exemption as long as their names are on the Warranty Deed. I can't get any info from the IRS. My questions are: 1) daughter/son-in-law are to claim the mortgage interest deduction for IRS taxes each year--not me. Can they do this being only on the Title or must they be on Warranty Deed or on the Mortgage itself? 2) Difference between Title and Warranty Deed? and how this protects me if they want to sell but I don't want to sell? Thanks in advance!

The rule for claiming mortgage interest and property taxes as a deduction is 1) you must actually pay those expenses and 2) you must be legally liable to pay those expenses.

It sounds to me like they might be legally liable for the property taxes (and will be paying them) since they will be on the deed, but they won't be legally liable for the mortgage therefore they will not be able to deduct that.

 

[davew128]

The rule for claiming mortgage interest and property taxes as a deduction is 1) you must actually pay those expenses and 2) you must be legally liable to pay those expenses.

It sounds to me like they might be legally liable for the property taxes (and will be paying them) since they will be on the deed, but they won't be legally liable for the mortgage therefore they will not be able to deduct that.

There are at least two tax court cases that say otherwise and based on the language for mortgage interest in 163, the court got it right.

(3) Qualified residence interest
For purposes of this subsection—
(A) In general
The term “qualified residence interest” means any interest which is paid or accrued during the taxable year on—
(i) acquisition indebtedness with respect to any qualified residence of the taxpayer, or
(ii) home equity indebtedness with respect to any qualified residence of the taxpayer.
For purposes of the preceding sentence, the determination of whether any property is a qualified residence of the taxpayer shall be made as of the time the interest is accrued.
(B) Acquisition indebtedness
(i) In general The term “acquisition indebtedness” means any indebtedness which—
(I) is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and
(II) is secured by such residence.

You'll notice that there is nothing that requires the taxpayer be on the mortgage, only that it be a qualified mortgage on the taxpayer's residence.

 

[LdiJ]

There are at least two tax court cases that say otherwise and based on the language for mortgage interest in 163, the court got it right.

(3) Qualified residence interest
For purposes of this subsection—
(A) In general
The term “qualified residence interest” means any interest which is paid or accrued during the taxable year on—
(i) acquisition indebtedness with respect to any qualified residence of the taxpayer, or
(ii) home equity indebtedness with respect to any qualified residence of the taxpayer.
For purposes of the preceding sentence, the determination of whether any property is a qualified residence of the taxpayer shall be made as of the time the interest is accrued.
(B) Acquisition indebtedness
(i) In general The term “acquisition indebtedness” means any indebtedness which—
(I) is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and
(II) is secured by such residence.

You'll notice that there is nothing that requires the taxpayer be on the mortgage, only that it be a qualified mortgage on the taxpayer's residence.

While I see your point, that runs contrary to anything I have ever seen or heard, particularly in the IRS continuing ed forums. Can you give me a cite for those two cases so that I can read them?

 

[davew128]

While I see your point, that runs contrary to anything I have ever seen or heard, particularly in the IRS continuing ed forums. Can you give me a cite for those two cases so that I can read them?

Uslu v. C.I.R., 1997 WL 770235, 5 (U.S.Tax Ct.) (U.S.Tax Ct.,1997)


Also, Reg. Section 1.163-1(b), Income
Tax Regs., provides in pertinent part: “interest paid by the taxpayer on a mortgage
upon real estate of which he is the legal or equitable owner, even though the
taxpayer is not directly liable upon the bond or note secured by such mortgage,
may be deducted as interest on his indebtedness.”

This was a big issue when I first started out. I know there are more cases on it than the one I posted.

 

[davew128]

Also, Ndile George Njenge and Ekinde Sone Nzelle Rachel v. Commissioner, TC Summary Opinion 2008-84. You need to show beneficial ownership, and there are cases where it did NOT get established. However given the facts the OP gave I don't see that as an issue.

 

[LdiJ]

Also, Ndile George Njenge and Ekinde Sone Nzelle Rachel v. Commissioner, TC Summary Opinion 2008-84. You need to show beneficial ownership, and there are cases where it did NOT get established. However given the facts the OP gave I don't see that as an issue.

Ok then...I am going to print out those cases for our office to review.

 

[tranquility]

In this instance the IRS is 0-2 in tax court on the issue and hasn't appealed to a circuit court, mostly because they really don't have an argument. I don't like these situations because it creates the potential for a lot of unnecessary scrutiny that results in no change, but from a compliance standpoint I wouldn't have any reservation with taking the deduction for the children provided they pay the mortgage.

I am aware of the cases and that is why I answered as I did. The kicker here is that OP is on title as well as the children. While that should not make a difference to the result, it does give a point to distinguish if it ever got to court.