Splitting mortgage payments with parents. This reader wants to know how to minimize tax implications and how to protect their later inheritance.

Q: I have been discussing assisting my father with his mortgage now that he is retired. We have decided on a 60/40 split of the monthly payment, and I’ll pick up the larger share. The thinking is that I’ll inherit the home when he passes and also, of course, assume the outstanding mortgage. 

My question is, how can I structure this arrangement to not only minimize tax implications (mine and his), but also make sure I am protected if circumstances change and someone else attempts to lay claim to the home down the road.

Splitting Mortgage Payments with Parents

A: You can definitely come up with a structure for partitioning ownership, but the questions are at what cost and how complicated do you want that structure to be? 

There are different kinds of claims other heirs could have against the home. You’re probably worried about having a relative come forward with the claim that they should have inherited the home and not you once your father passed on. The other kind of claim is a litigation type claim against the owner of the home. Any owner of that home would be responsible for the activities that go on in the home, any liens that have been filed and any injuries that may occur there as well.

Tax Implications

From the tax point of view, you have several things to consider. The first is whether your father is entitled to any real estate tax benefits due to his income, age and length of time he has lived at the property. If you change his ownership structure, you need to figure out if your dad would lose out on any of those real estate tax benefits.

The next issue would relate to federal income taxes. Currently your father should receive any federal income tax benefits from owning the home and living there as a primary residence. For one, he can deduct the interest he pays on his mortgage and he can deduct up to $10,000 in real estate taxes. (The maximum deduction for state and local taxes on your federal income tax form is $10,000.) Finally, this deduction will depend on whether you itemize your deduction or not on your federal income tax form.

For you to deduct interest on the loan, the loan must be a lien on a property you own so if you simply share the expense with your dad, your dad can deduct the interest but you probably will not be able to do so.

How to Formalize the Arrangement

Having said all that, if your dad wants to convey a part of the home to you, you’ll need to formalize that arrangement. You may decide to put the house into a trust. Once the home is in the trust, you and your father could be the beneficial owners of the trust. The trust document would spell out the responsibility for payment of expenses and also provide for the distribution of your dad’s interest in the trust upon his death. 

You’ll need to have a frank discussion with your father to see what your father actually wants to do with the home and who he feels should be entitled to it once he dies. What you think and what his actual wishes might be could differ and you are trying to make sure that you and he are both in total agreement on this issue. For the sake of the family and the relationships you’d like to maintain in the future, you need to be thoughtful about how you proceed on this issue. 

The last thing you need is for relatives to think that you pressured your dad or took advantage of him. 

You’ll want to build a solid paper trail of what you end up putting into the home financially and a record of the desires your dad had for you and the home. (This is where a will comes into play.) It’s also smart for him to write down if he wants any family members to get anything from the home (even tchotchkes take on larger meaning after a loved one passes). 

Next Steps

For all of these reasons, you need to sit down with an estate attorney to help you paper the file and put a structure in place that will work for your dad, you and the rest of the family. Remember, if you end up having an ownership interest in the home, make sure you let your insurance carrier know so that you have insurance coverage not only for the home but also liability coverage in case somebody gets hurt there.

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