Questions and Answers

I will be posting some questions and my answers to assist those looking at this blog for some information. This site is not set up to allow for posting questions from readers as I am not giving away free advice. I know this sounds insensitive, however I have been in the consulting business long enough to know that if you are asking my advice, then it is worth something.

Anyway, these are questions I have heard and some I have been directly asked. I have changed names and some details so as not to compromise the individual that originally asked the question.

This is the first:

Question:  In 2015 I took on the mortgage on a property my daughter and son-in-law wanted to purchase but their credit fell through at the last minute. They were on the title, I was not. Through 2019 they made all the mortgage payments (though the mortgage was in my name). I never claimed the property as an investment, and nobody ever took any deductions for it. I think we missed out on some tax breaks but I have no idea how to file amended returns to clean this up.

The original mortgage was set up as an investment because it isn't my primary residence. And it's currently being refinanced as an investment property for the same reasons. At no time has anyone told me that the fact that it's being used as a family member's primary residence would change its tax status. I need references for that.

Someone should be getting the mortgage interest deductions though, yes?

Answer: Ok, to review - 2015 to 2018 the father paid the mortgage payments on a house that was lived in by his daughter. There was no rental agreement. The deed was in the daughters name. In 2019 the daughter made mortgage payments.

Based on information I have, this is not an investment property for the father because there was no intent for him to "profit from the transaction". He could have taken the interest deduction on Schedule A as a second home through 2018. Technically since he did not make the payments in 2019 the interest deduction should not be taken and since the daughter did not have an obligation to make the mortgage payment, she would not be able to take the deduction. 

Publication 936 has mortgage interest deduction information.

As far as the investment property portion, this would have been a rental property and should have had a rental agreement and all the other income/expenses etc accounted for. When selling a second home or rental property (to include transferring to a family member) a taxable event occurs. In this case it is already deeded to a family member. In my opinion, since it is deeded to someone else, it would not meet the rules as an investment/rental property for the father.

This is a complex issue and if I were preparing the tax return, I would be on the phone with the IRS for an opinion with follow-up correspondence for the file. My opinion if audited there would be issues.