Expert: Dick Dennis - 8/17/2006

Question
Hi Dick,

My wife and I currently own a house in the SF Bay Area of California. As I'm sure you're well aware we are in a bit of a buyers market. My wife and I want to move to a bigger house as we just had a son, however we want to avoid selling our house for several year (3-5). The rent we can make will cover the mortgage, but we will have to cover property taxes. Unfortunately with the rates on the rise and not wanting to pull money out, we would have to do a 100% financing at an unfavorable rate.

My mother-in-law has indicated she wants to help us buy the new house. My wife and I would be the occupiers, she would pay 1/2 the mortgage, we would pay the other half (still 100% financing). We also plan to by a fixer and spend our own money for repairs. The plan would be to split the equity after a predetermined number of years.

So here's the issue, my mother-in-law makes quite a bit of money (well over the 150K AGI). She wants to be able to write off the interest she pays. According to her CPA, she has to co-sign the loan, however according to two mortgage brokers if she is on the loan, the loan is considered and investment property and the rates are terrible. If my wife and I get the loan on our own, we get a better rate. Is there a way around this, so she's not a cosigner, but gets the interest (and propert tax) deductions? Or is there a loan program for equity sharers thats considered owner-occupied?

Your help is greatly appreciated,
Jason

Answer
First of all, Jason, your MI-L has to be on title with you if she is to be considered for any kind of tax deductions. I presume you will take care of that. The IRS will not allow any deductions for her if she is not on title.

Since your MI-L does not occupy the property, it is automatically an investment property for her, as far as IRS is concerned (50%).

Since she has 50% interest in the property, your MI-L can execute a note and deed of trust, secured by the 50% equity she has in the property, PAYABLE TO YOU. While you are paying on the regular trust deed, she will pay you what amounts to half of the loan you took out on the property. And that trust deed for which she is responsible, will equal half of your monthly obligation, including taxes and insurance and mortgage insurance (he lender is going to require that for sure.)

Your MI-L can then write off her expenses on her 50% ownership of her investment property (remember, that is what that property really is to her). She should also take depreciation each year of ownership. The IRS demands it. She can talk to her CPA how she will take care of that to satisfy her financial position.

There you have it, Jason. You (you and your wife) and your mother-in-law are on title with you. You have your own first trust deed with the loan you got to buy the house. And your mother-in-law is responsible for a second trust deed secured by that property as she pays you half of the monthly obligation.

Since she owes the 2nd trust deed to you, should she ever stop making payments, you could foreclose on her second mortgage to you and repossess her half of the property. On the other hand, if YOU stop making payments on the property, then the lender will want to foreclose on the whole property. And they can because they made the loan to you based on 100% of the value of the property.

But she can take over your obligation by approaching the lender since she is half owner. I am covering all the bases just in case such eventualities occur.

Everything I suggested is perfectly legal. To make sure it is done correctly, have a REAL ESTATE attorney do all the paperwork for you and make sure you understand the details.

I wish you well.

Dick Dennis         dixiedee13@aol.com