It’s getting common for parents providing assistance to their children to buy home when the property price is soaring nowadays.
There are three myths you need to be aware of. It is going to be pricy for these mistakes:
Myths #1
As long as the 1098 shows the child’s name, the child can deduct the mortgage interest even though the parents were the one to pay for it.
The answer is WRONG.
The child has to be the one who pays for the mortgage. The fact the child’s name on mortgage and even the 1098 has the child’s name will not help.
In fact, the arrangement above will trigger gift tax to the parents as well. The worst is both party can’t deduct the mortgage interest!
Myths #2
If the child can’t get loan and thus the parent’s name is on the loan instead, the child can’t deduct the mortgage interest even though the child lives there and pays for the mortgage.
The above statement is WRONG.
Although the parent is the legal owner as his name is on the loan, the child can be the equitable owner. As long as there is a contract setup between the legal owner and the equitable owner who also pays for the maintenance expenses for the houses.
On top of this, the equitable owner (the child) must live in the property and pay for the mortgage. To further become equitable owner, he or she should put in as much down payment as possible to defend the tax position.
Myths #3
If the property is co-owned by parent and child equally, the interest should be deducted equally regardless how much the child actually pays
The above statement is again WRONG!
If the child pays for 100%, he or she can deduct 100% of the mortgage instead of allocating based on the ownership percentage.
After reading the above three myths, you may have better understanding about the mortgage interest deduction. It should consist of three important factors as follows:
1. Who has the ownership of the house?
2. Who paid for the mortgage?
3. Who has been living in the property as primary residential?
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