Q: My mother-in-law was recently widowed. She owes $150,000 on her house, which has a market value of $300,000.
She needs to bring in some extra cash each month. We looked into reverse mortgages, but they don’t make sense for her situation.
I will be helping her with the mortgage and real estate tax payments. But if I’m making payments, I want to be able to deduct the amounts that we use for the mortgage and real estate taxes on my income taxes.
What’s the best way to handle this for legal and tax purposes? Should she quitclaim the home to me? Should I file a mortgage on the property? There are no other siblings.
A: We’re sorry for your family’s loss. Losing a parent is traumatic, particularly when there are no other siblings to help in picking up the pieces.
Regarding your mother-in-law’s financial situation, here are a couple of questions to consider: How much cash does your mother-in-law need each month? And, if you don’t help her, will she have to sell her home?
Let’s assume your mother-in-law wants to stay in the house but needs more cash to live on each month. While quitclaiming the house to you is one possibility, there are other options and ideas she should consider.
For example, instead of giving you the property, your mother-in-law could sell you her home. Once you own the home, you could get a mortgage in your name and make the monthly mortgage payments.
You and she could then decide what kind of help she needs and what kind of help you want to give to her. You could let her stay in the home rent free or you can have her pay some or all of the monthly costs of owning the home.
If you purchase the home from her, you’d be entitled to deduct the real estate tax payments and mortgage interest payments. Also, the ownership of the home might qualify as an investment property for you and may give you other tax benefits. You should consult a tax advisor further on these accounting issues.
Let’s look at how this picture would change your mother-in-law’s life. If you bought the home from your mother-in-law for $300,000, your mother-in-law would end up with about $150,000 cash from the sale of the home. Since you’ll be picking up all of the costs associated with the house, she would then only be responsible for making a monthly “rent” payment to you. You and she could decide what would be the right amount.
The sale of the home would give her cash she needs. She won’t have to pay federal income taxes on the sale of the home to you so long as she has lived in the home for two out of the last five years and the profit from the sale does not exceed $250,000 if she sells in the year after the death of your father-in-law or $500,000 if she sells in the year of your father-in-law’s death.
But you would have to have an in depth conversation with your mother-in-law to make sure she is comfortable selling the home to you.
If she wants to continue to own the home, you could lend her money for the real estate tax and mortgage payments. You could file a mortgage on the property for the current amount you lend her and for any future loans to her.
But you’ll need to seek assistance from a real estate attorney to properly document what’s going on. Keep in mind that the payments for the taxes and the mortgage would only be deductible by your mother-in-law on her federal income taxes.
Any payment to you of interest on the loan will be income to you for income tax purposes.
You might also benefit from talking to a financial planner to determine what other options exist to help meet your mother-in-law’s true financial needs.