Co-Signing on a Mortgage: No Tax Deduction

Q: Like so many parents these days, we would like to co-sign a mortgage loan for our single-parent daughter. Our daughter will make the down payment and all the monthly payments. Our broker said that because our daughter’s income is not very large, we could use a portion of the mortgage income deduction that she doesn’t use because we are technically on the note. Is this correct? --K.F.T.

A: Your broker has led you astray. The plain fact is that if you do not make any of the mortgage payments, you are not entitled to any of the mortgage deduction. It does not matter whether your daughter can make the best possible use of this write-off or not. If you think about it, the logic becomes clear. Why should you get a deduction for something you are not paying?

If, however, you should share in some of the mortgage payments, you would be entitled to a deduction. But you would have to claim your daughter’s home as your second residence, as mortgage deduction rules have been tightened since 1986. If you already own a second home and are claiming a mortgage deduction there, you would not be entitled to another second-home mortgage deduction on your daughter’s home.

Homeowner Says Fees Are Double Taxation

Q: I recently purchased a new home and was required to join the local homeowners association. My fees cover the cost of construction, maintenance and insurance for the project’s streets and parks. My development is not a gated community and the streets and parks are open to the public. I think I am being taxed twice since I already pay property taxes for the upkeep of the city’s streets and parks. Do I have a strong argument to challenge these fees? --R.N.

A: Check with your homeowners association. In all likelihood you will find that the streets and parks in your development have not been dedicated to the city or county. Although these facilities may be open to the public, technically they are considered private property and are the responsibility of the association to maintain. The fees you pay for this are not considered a tax because, by definition, taxes are used to maintain public facilities. Hence, no double taxation.

Perhaps the logic of this argument leaves you a bit perplexed, even angry. But you’re not likely to get very far in your challenge. However, a portion of your homeowners association fees may still be deductible when you sell your home. To the extent that your fees are used to construct permanent capital improvements to the development--streets, swimming pools, clubhouses, etc.--the charges for these projects may be added to the basis of your home. The effect of this will be to reduce your taxable gain when you sell your home.

Adding a Name to a Mother’s Mortgage

Q: I’m sure there are other adult children who are trying to help their parents make ends meet. In my case, my widowed mother needs me to help make her monthly mortgage payment. I am more than willing to help, but need some advice on the best way to proceed. Can she add me to her home deed without triggering a property tax reassessment? Can I get a tax deduction for the mortgage payments? --F.A.

A: Adding your name to your mother’s deed should not trigger a property tax reassessment. Under a California law that became effective in 1988, transfers of principal residences between parent and child are exempt from reassessment for property tax purposes. In order for you to claim a tax deduction for the mortgage payments you make, your name must also be added to the mortgage loan itself. By the way, as in the first question, you would be claiming this deduction as a mortgage on a second home.

Having explained all this, there may be some important issues you want to consider before adding your name to your mother’s home deed and mortgage. For starters, adding your name could be considered a gift of half the house’s value. Depending on the size of your mother’s potential estate, this could have gift tax implications.

Even if your mother’s estate is modest, giving you the house now will expose you to a greater income tax burden upon your inheritance, and subsequent sale, of the home. Remember, when your mother dies, the value of the portion of her home that she owns will be set as of her date of death. However, if she gives half the home to you now, that half retains its original tax basis and, when you sell it, you would be liable for income taxes on the difference between the basis and the sales price.

Let’s put some numbers on this. We’ll say the house has a basis of $50,000 and a fair market value of $250,000 upon your mother’s death. If she is the sole owner at her death, the home’s tax basis is automatically reset at $250,000. If you sell it for that amount after her death, you would not have a taxable gain. However, if she gave you half the house before her death, only her half would be revalued (to $125,000) and your half would be worth half the original basis, or $25,000. The total basis would be $150,000 and if you sold the home for $250,000 you would have a taxable gain of $100,000.

Clearly, you have to weigh the value of a mortgage deduction now versus a future non-taxable gain on the proceeds from the sale of the home.

This assessment should include whether you stand to inherit the entire home by yourself or whether you would be sharing the estate with others.

Another factor is your mother’s age and how long she is likely to need your help in making the mortgage payments and how much of a burden making a non-deductible monthly payment poses for you and your family.