Question

Home interest deduction

Forum|Forum|1 year ago
August 27, 2024
1 reply
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My wife and I are buying a duplex with my son and his wife. We will split all costs 50-50. At the moment my wife and I are not on the loan. Only my son and his wife. All 4 of us will be on the deed and title. Will my wife and I be able to deduct loan origination points from our federal taxes?

Not A Product Question

O

Opus 17

Employee

You can deduct mortgage interest on your main home and one second home. You must either be a legal owner on the deed) or a "beneficial" owner (which I will not go into since you are on the deed already). You do not have to be a named borrower on the mortgage. You can count this as your second home for the deduction, presuming you don't already have a different second home you are deducting. (It is not your main home unless you live there most of the time. You can't deduct 2 second homes in lieu of one main home and one second home.)

You must also be the taxpayer who actually pays the mortgage (which it seems like you are).

There is a maximum indebtedness of $750,000 in most cases, so if your main home has a $600,000 mortgage and this second home has a $500,000 mortgage, your interest deduction will be limited since your combined indebtedness ($850,000) is more than $750,000.

For property taxes, you must be a legal owner of the home against whom the taxes are assessed and you must actually pay the property taxes. The way the law is written, there is no provision for a beneficial owner to deduct property taxes (but again, we don't need to discuss what that means since you are on the deed already.)

S

Stumpy2Author

Thank you for the reply. It’s very helpful.
I have 2 follow ups:

1. You said, “You must also be the taxpayer who actually pays the mortgage (which it seems like you are)”. I will be maying my share of the mortgage, but I will not be on the loan. I assume I will still be able to deduct my share of the interest. Correct?

2. This will be my second home, but only for a month or two. I plan to sell and put a lot down on my share of the duplex. If I am NOT on the loan, does that create a problem with capital gains or any other issues?

I feel like the safest thing is just to be on the loan. We haven’t closed yet, and there is plenty of time for me to be added to the loan. I think mostly the loan officer doesn’t want to redo the paperwork. Thoughts?

O

Opus 17

Employee

@Stumpy2

As I said, you do not have to be listed on the mortgage to deduct mortgage interest, as long you actually pay some of the interest and are either a legal (on the deed) or "beneficial" owner.

2. This will be my second home, but only for a month or two.

A second home is any home that you own, that you decide to call a second home, even if you don't live there. You just can't have more than one second home for the interest deduction. If you mean, it will become your main home because you plan to move in, that's fine too.

does that create a problem with capital gains or any other issues?

The sale of your current main home is completely separate from any other purchases or transactions. The rule that you could postpone capital gains by purchasing a replacement home was eliminated in 1997. The current rule is that you can exclude the first $250,000 of gain from your taxable income (or $500,000 if married filing jointly), as long as you owned that home for at least 2 years and occupied it as your main home for at least 2 of the 5 years prior to the sale. See publication 523.

https://www.irs.gov/forms-pubs/about-publication-523

I feel like the safest thing is just to be on the loan.

That's more of a legal matter between you and your son, and not really a tax matter. Every co-borrower is jointly and severally liable for the entire loan amount. That would mean, for example, that if your son fell on hard times and stopped paying, you are responsible for the entire amount even though you only live in half the home. On the other hand, being listed on the mortgage may give you more rights and more advanced warning if something bad did happen. But you shouldn't decide that based only on the tax treatment.