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Wallstreet Esq.
Wallstreet Esq., Tax Attorney
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The following is a real estate question, but does touch on

Customer Question

The following is a real estate question, but does touch on tax/estate implications.
My wife and I are considering purchasing a second home (2 bdrm Condo) in LA, Ca (primary home in PA). We will live there seasonally, but my daughter, who now lives and works in LA would occupy full time.
With regard to mortgage and title, are there any steps we could take to maximize tax/estate benefits?
i.e.: If my daughter was on the mortgage, (mortgage can be written as "tenants in common" delineating % ownership), would she generally get a higher tax break then my wife and I would. (My daughter’s salary is approx. $50k and wouldn’t qualify on her own, and we are in the 39.6% bracket and have our deductions reduced). Could this also impact (negatively) the rate we could get on the mortgage?
WRT title, could we buy the property in the name of a trust and have my daughter as a beneficiary? Could we Deed the property to my daughter (to avoid inheritance tax) and do we have to keep the mortgage as tenant in common? Would this even be necessary as my wife and I currently have Revocable Trusts set up in our Wills to pass our estate?
I know this is more complicated than can be answered here, just looking for various general strategies to consider, and their advantages/disadvantages.
Submitted: 1 month ago.
Category: Tax
Expert:  Lane replied 1 month ago.

Hi My name's Lane. I can help you here.

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First on the mortgage interest deduction, she would need to have ownership AND be on the mortgage. (That's the tax law issue).

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And, from a procedural standpoint, you'd want her listed as the primary borrower, so that it's her (her social social security) that gets the 1098 (makes taking the interest deduction clean/ smooth, in terms of what the IRS system expects).

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It COULD impact the rate (her being on the loan) but only if she has adverse credit reporting.

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And as you mention, the tax break is obviously bigger for you, (39.6% of the interest cost vs 25 or maybe even 15 depending on your daughter's deductions and exemptions) BUT ... if you are at the point where itemized deduction are being phased out (adjusted gross income (AGI) more than $309,900 if married filing jointly) or if you have AMT issues, the bigger number may be hers.

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Also note that the mortgage is either an individual or a co-borrower mortgage (her being the borrower and having the two of you co-sign would have HER get the 1098) but the tenants in common and other forms of ownership are an ownership issue (deed, titling, not the mortgage)

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In terms of title, it would only be it you purchased the house through IRREVOCABLE trust (or gifted to an Irrevocable trust) that would potentially reduce estate tax.

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Depending on your situation, that may or may not be needed. The current estate tax exemption is $5,450,000 and now that portability of the marital deduction has been made permanent the effective exemption is $5,450,000 x 2 = 10.9 million. (and this is now going up almost every year - indexed to inflation)

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Lets start there and you can ask follow-up questions from here.

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Lane

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I hold a law degree, with concentration in Tax Law, Estate law & Corporate law, a Master’s Degree, with specialization in financial accounting & tax, a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, since 1986

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