A young man owes $90,000 on his mortgage, but his father wants to pay it off for him. Any tax issues? Other?

Question

A friend of mine is in a unique position to have his house (mortgage) paid off by his parents. Question is, will there be any tax issues?

If my friend makes monthly payments to his parents (that is, should his folks essentially become the mortgage company), would this allow a way to legally avoid tax (or other) financial penalties?

Answer 1

It is my understanding that you can receive up to $11, 000 from an individual tax free in any year. I also think that if a mother and father want to give money to their child or anyone else, that person can receive multiples of up to $11,000; just from different individuals.

I believe that the IRS would be able to "sniff out" attempts to circumvent this limit. For example, if Dad sent $11,000 each to a number of aunts and uncles of the mortgagee with the "understanding" that the money would then be routed to his son, then the IRS would no doubt object.

You would have to weigh the tax consequences of a one time gift of this sort to the mortgagee to the cash outlay each year toward the remaining balance minus the itemized deduction for mortgage interest to how "junior" benefits with a a series of 8 yearly tax free gifts of $11,000 from the old man (8 times $11,000 = $88,000).

Another plus would be that the old man's estate becomes smaller which might mitigate estate taxes depending on the size of his estate and who the primary and secondary beneficiaries are in the will. You really need to visit with a CPA specializing in tax work to get all the pluses and minuses worked out. Get professional help and do it legally.

Other answers talking about depreciation would only relate to investment property, (if the mortgage was on a rent house) not your personal residence. That is why you must consult a professional. Don't give the IRS an excuse to come after you for back taxes, penalties, and interest. You would be on their excrement list for a couple of years anyway.

Answer 2

First the money is not going to him directly it is going to the mortgage company. They are paying a debt that is owed. Plus when filing taxes you can take a percentage for your home depreciation. He should speak to a local free tax consultant. I know that a parent used to be able to give $6,000 a year to a child without taxation. But my parents have been dead a long time and they turned over a property to my sister, she had to pay the property taxes and they had to do something about the amounts they took on depreciation. Most of a home loan is paying the interest what they are doing is allowing him to no longer pay such high interest rates. If his parents pay off a bill, I can't see why he would be taxed for that. His home is in his name, they are helping pay a debt. His parents would be the ones who would have to show what they did with this money. I would like to see what other people say because his parents have been taxed for this money they are paying off a debt so that he doesn't have to pay the high interest, if the money is going directly to the company he is not taking this personally. You can take depreciation for the home as long as he is not selling the house right away because if he made money on the sale of the home and it was a much larger amount than he paid for it than he would be taxed on the gain from the sell of the home. But for them paying off the debt I can't see that being double taxed? I would like to see what others say about this also. I hope some tax accounts comment. Just my personal view.

Answer 3

How does the mortgage company or IRS know who paid off the loan? Can't see a gift tax being a concern, however check to see if there's a pre payment penalty for early pay off. If you have to pay back the parents, will you be paying any interest?

Check about capital gains if you've owned it for less than two years. Invest the cash you save, in interest payments, for another property and get the interest and deprecation write off there.

Answer 4

I learned that there are tax breaks for people who do not pay off their home. Why would the man's parents want him to lose out on those?

From your second question, the word "manipulation" comes to mind. Check the search engine to learn more about that.

If the home is in the man's name then his parents paying to him the total payment amount to pay off the mortgage will not make the parents a mortgage holder. If it is a gift then he doesn't have to repay them (maybe they are elderly and merely want to bypass some estate taxes themselves). Seems to me though if he accepts such a large amount from his parents that he would have to claim it on his taxes so I don't think he would get much back if any at all from the government for that year in which the money was received, so if he planned updating his home that year the money from his taxes would go for taxes for that year. He should check with an accountant to be sure though.

Answer 5

You better check with a local CPA about this one. If the father pays off the loan, essentially a gift, there might be some tax implications for the son. I can't remember is there is a $10,000 limit per year, or some lifetime amont that you can give away.

Since the son is the beneficiary of the "gift" he may owe some taxes, if it is classified as income.

For $90,000... it would be good to actually pay an accountant for an hour's work to tell you what to do.

Answer 6

There are no tax or financial penalties associated with paying the mortgage to the mortgage company. If he pays off his mortgage he wont have the mortgage interest to claim as deduction on his taxes next year...

Answer 7

There's not tax's that have to be paid by your friend. Your friends father will have to pay a gift tax on the amount in excess of $7,500. If your friend is receiving the amount of the loan as a loan from his father. The interest rate on the loan from the father has to be a market rate interest. If the loan from the father is not at market the amount of the loan can be considered a loan.

Frank Barragan
Tax Law Student.

Answer 8

if his mortgage is paid off, he will no longer have the mortgage interest deduction on his income tax return.
the money he was paying as interest will now be income he hasn't paid income tax on. are his parents name going to be added to the deed?

Answer 9

Yes Taxes will have to be paid either way, Schools, cops, or the City, or Fireman, ect. has to get paid some how!!!