Ok fellow DLanders. I could really use your input on an issue that is causing a dear friend of mine a lot of heartache.
A couple of years ago my friend purchased a two family home and lives in it with her married child and their spouse. The mortgage and deed are in her name, but everyone went into the deal as a 1/3 owners (friend, child, spouse) and made up a personal document to say so. And they would inherit upon my friend�s death. Unfortunately they forgot to include how the tax deductions would work in the agreement.
The children have a rental property they claim as primary residence for tax purposes, so my friend pays 100% of the mortgage/escrow, etc. each month on the house and the children "gift" her a reimbursement of 2/3 of the total she has paid. Because of the other residence, the children cannot deduct the mortgage money they pay my friend on their income taxes unless they call the other residence a rental.
So, this year��..
Since the children can't claim the mortgage payments they make to my friend as a (primary residence) deduction she suggested they figure their taxes two ways. One without the deductible portion of the mortgage payments they make to her, and one with (as a grand total of both property�s payments). My friend would then give them a check for the difference in what their refund would have been if they could have used the deduction for the second property (a refund difference of $3,120).
The children disagreed. They wanted my friend to figure HER taxes both ways, i.e. if she could only claim 1/3 of the deduction what refund would she get - $3,659 and if she claimed 100% what would she get - $8,889. Then give the children that difference - $5,230. Their reasoning is that she gets the advantage of being able to take the deduction and they should get the benefit since they are actually reimbursing her. They state �what, are we renting???" and are quite angry.
Now one would think the difference of $3,120 would be the same for both of the taxpayers, but it's not. I assume the reason is because my friend�s income and the tax withheld from that income and her other allowable deductions are significantly different than those of the children - so the mortgage interest deduction affects her return quite differently than it does theirs.
The children�s logic is that they actually paid the money to my friend, so they should get the refund she�s getting by claiming the full amount of the deduction. Her logic is that she is happy to give them a check for the refund they would have gotten based on their tax, withholdings and allowable deductions if they had been able to use the deduction.
Neither she nor I are quite sure which logic is right. It SEEMS as if she paid them based on her tax return it would be taking advantage of her income, tax withholdings and deductions, not just the mortgage amounts.
But we may easily both be completely wrong. I have asked a number of my friends � as she has done in turn. And I thought � why heck � I bet some of you may either be in the same boat (as either the parent or the child) or have some interesting degrees in accounting, finance or other helpful careers.
Any thoughts?
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