What happens to your taxes when you co-sign a mortgage for your child? It all depends on how you decide to hold title on the home.

Q: If I co-sign a mortgage so my son can buy a house, how will that affect my taxes for the profit when it is sold? He will make all the payments including the closing costs when the house is bought.

What Happens When You Co-Sign a Mortgage For Your Child?

A: You can’t imagine how often we’ve received this question in the past ten years, since the housing crisis. As Millennials are graduating with steep student loan payments and credit card debt, it’s been increasingly difficult for them to afford housing. So, parents and other relatives have stepped in to assist their children and grandchildren with down payments or, in many cases, cosigning loan documents in order for the kids to qualify for the mortgage.

When parents assist their kids by cosigning loans, the parents may think of themselves as guarantors but if the lender requires the parents to be co-owners and co-signers on the loan, they actually will be borrowers and owners with their kids. When a lender has the parents sign a document agreeing to guarantee the loan and does not require them to hold title to the home, they are guarantors. We usually see the situation where the lender requires the parents to both own title to the home with their kids and also sign all of the loan documents.

While the child lives in the home, the child usually takes all of the federal income tax benefits associated with any deductions on the interest paid on the loan and any deductions associated with the payment of real estate taxes. Likewise, when the child sells the home, the sale is reported on the child’s social security number and not the parent’s.

Taxes to Consider When Your Child Sells the Home

Down the line when your son sells the home, your son should be entitled to exclude from federal income taxes up to $250,000 in profit from the sale of the home. If your son is married, a married couple can exclude up to $500,000 in profits from the sale of the home. There are certain limitations and qualifications as usual. The biggest requirement is that the home must be owned and occupied as a primary residence for at least 2 out of the last 5 years by the married couple.

Even if you are a co-owner of the home, as long as your son treats the home as his alone, pays all the expenses on the mortgages, pays any real estate taxes and takes care of the home, you shouldn’t be considered an owner or responsible for any profits on the sale of the home. Your role should be considered as a mere guarantor on the loan. And, your kid should be (very) thankful for your help.

However, cosigning the mortgage means that should your child stop making payments, the lender will look to you to pay the entire mortgage amount, plus any catch-up amount that is owed, if your child has stopped making loan payments. Legally, you are responsible for 100 percent of the mortgage, and if the child stops making payments for property taxes and you don’t pick up that up, you could lose the property for nonpayment of taxes. So, make sure you are confident your child can easily make the mortgage and property tax payments before he closes.

Other Considerations Before Co-Signing the Mortgage

One last consideration: how you and your son will own the home. While you and your son could own the home as joint tenants with rights of survivorship, you should have a conversation with your son as to what each of you would want in case either of you should die while you own the home. Generally, the parent wants any interest the parent has in the home to go to the child, but it isn’t always the case that the parent wants to own the home if something should happen to the child.

It’s worth a discussion and if both of you agree that the other should be the sole owner of the home should either die, then the choice should be to own it as joint tenants with rights of survivorship.

On the other hand, if you and your son wants to make sure that he, his wife or children inherit the property on his death, you might want to consider a different arrangement. You can use living trusts, own the home as tenants in common or various other alternatives to make sure that upon your son’s death, his share of the home doesn’t come back to you. You’d want to talk to an estate planning attorney or real estate attorney to go over your options.

And remember, when a lender requires you to co-sign on the loan, they will require you to be an owner as well. Good luck.

More on Mortgage and Financing

Why Cosigning Your In-Law’s Refinanced Mortgage is a Mistake

What’s the Best Way to Help a Family Member with a Private Mortgage?

Will Being on the Title of Your Parent’s Home Affect Your Taxes?