Consequences of Foreclosure Include Not Being Able To Buy Your Own Home

Q: I sold my home in a short sale several months ago. Now, my credit is bad. My in-laws bought a house for me using my money, but the mortgage and the house is in their name. I pay for everything, but nothing is in my name.

Is there a way that I can claim the mortgage interest?

A: First, you’ve placed yourself in a precarious position. What you’re really doing is renting the property from your in-laws. Unless you documented the “loan” you gave them to buy the property, you have nothing. And, if they decide to turn against you, you could lose everything you put into the property.

I talked to a tax professional over the weekend and ran your question by him. Bill Nemeth, an enrolled agent and co-owner of several Jackson Hewitt offices in the Greater Atlanta area, said there is some precedent for the IRS allowing the person who pays the mortgage directly to the mortgage company to take some of the benefit.

But because your name isn’t on the mortgage, you won’t receive a 1099 from the mortgage company.

If you try to claim the deduction, the fact that you don’t have a 1099 from the mortgage company might be a red flag for you. Nemeth suggests that you be sure to keep all copies of the checks you paid directly to the mortgage company, so if the IRS comes back, you can prove what you paid, and when.

You should figure out a way to finance this property on your own (or with your wife) as soon as possible.

You may also want to try to find out when you can transfer the ownership of the home into your name. I could see how your in-laws would not want to transfer ownership of the home to you while they are still on the hook for the mortgage, but they may be able to add you to the title to the home. If you are on title, they can’t sell the home out from under you.

In any event, you should have some documentation to make sure everybody is clear on who gave the money for the home, who is responsible for the payments and who would benefit from the sale of the home. You don’t want to find out several years from now when you try to sell the home that your in-laws expect all or part of the profit from the sale unless you and they have agreed to that split.

Please talk to a tax professional for more details.