Unique Situation Regarding Financing and Ownership

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Unique Situation Regarding Financing and Ownership

Lakshay G.
Small Business Owner · Fallston, MD · Member since 2014 · 145 posts · 20 votes

I am ready to start my journey in real estate in buy and hold field. My wife and I live in a house that my parents own and pay them money for the mortgage (not calling it rent as my parents aren't profiting from me). He has another house that he lives in and owns. After speaking with a bank lender and getting pre-approved (great credit score as well as income to debt ratio), he says that he hasn't helped one investor in his 20 years that don't own a house for primary residence and look for rental properties and my case is very different. After explaining him my situation, he "recommends" that my parents should add me in their deed for the house that I reside in and after few months, I should refinance and remove my parents' name from the deed so that only my name would be on the "new" loan. This way, he says I will get tax benefits (writing off interest paid and then some more) from investment properties because I own my primary residence. My caveat is, aren't my parents getting tax write offs on their investment property (that I live in)? I am very close to my parents and unless until I know we will benefit majorly by going through this name changes on the deed/refinance. It doesn't quite matter to me whether I collect tax benefits or my parents.

So the question is, should I leave my rental condition as is and invest in Rental properties worry free or should I try to "own" my primary residence?

Thanks in advance everyone.

My goal is own at least 1 rental property within next 6-8 weeks (Anne arundel county, prince george county area).

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Christopher Phillips
Real Estate Agent · Garden City, NY · Member since 2016 · 3k+ posts · 1k+ votes
9y

@Lakshay G.

It's actually not uncommon for people to not own property but buy rental property. Obviously, that will vary depending on where you live.

Adding you to the deed can be done, but not without potential consequences. The Govt. doesn't like it when people try to do estate planning that way. Adding you to the deed becomes a gift in equity and can cause your parents to pay gift tax (there are annual and lifetime limits). You would need to speak with an accountant or an estate planner to make sure it's done the right way.

Also, adding you to the deed takes away their potential to avoid capital gains taxes down the road if you sell. There is an exemption for single people ($250,000), and married couples ($500,000). But parent and child together on the deed will not receive an exemption.

You should speak with an accountant or an estate planner to make sure you handle everything in the best way to benefits everyone.

In your situation, if you pay the mortgage yourself, you would be able to write off the interest and the taxes. It comes down to actually paid it. If you pay your parents and then they send in the payment, then they would write off the interest and taxes. So, speak with a professional to get some advice.

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  • Christopher Phillips
    Real Estate Agent · Garden City, NY · Member since 2016 · 3k+ posts · 1k+ votes
    9y

    @Lakshay G.

    It's actually not uncommon for people to not own property but buy rental property. Obviously, that will vary depending on where you live.

    Adding you to the deed can be done, but not without potential consequences. The Govt. doesn't like it when people try to do estate planning that way. Adding you to the deed becomes a gift in equity and can cause your parents to pay gift tax (there are annual and lifetime limits). You would need to speak with an accountant or an estate planner to make sure it's done the right way.

    Also, adding you to the deed takes away their potential to avoid capital gains taxes down the road if you sell. There is an exemption for single people ($250,000), and married couples ($500,000). But parent and child together on the deed will not receive an exemption.

    You should speak with an accountant or an estate planner to make sure you handle everything in the best way to benefits everyone.

    In your situation, if you pay the mortgage yourself, you would be able to write off the interest and the taxes. It comes down to actually paid it. If you pay your parents and then they send in the payment, then they would write off the interest and taxes. So, speak with a professional to get some advice.

    2Reply
  • Lakshay G.
    OP
    Small Business Owner · Fallston, MD · Member since 2014 · 145 posts · 20 votes
    9y

    thank you @Christopher Phillips  

    1Reply
  • Malcolm Lawson
    Annapolis, MD · Member since 2015 · 132 posts · 52 votes
    9y

    Have you ever calculated how much rent your parents could be getting if they rented to other tenants for a profit? If they could cash flow an additional $200 or so a month then maybe you would best serve them by helping them get a renter in there and help them get into the world of REI.

    Then you could purchase a primary residence possibly with a small rental unit built in.  

    Just a thought.

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  • Lakshay G.
    OP
    Small Business Owner · Fallston, MD · Member since 2014 · 145 posts · 20 votes
    9y

    Thanks @Malcolm Lawson for the great tip. I have that in mind for my parents as well, not quite there just yet!

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  • Roan LaPlante
    Rental Property Investor · Proctorville, OH · Member since 2016 · 13 posts · 4 votes
    9y

    This sounds like a bad idea from a perspective of keeping your family happy (and keeping the government out of your parents estate planning). I wouldn't worry about the tax benefits of deducting interest from your mortgages on your rental properties in your particular situation.

    The main question I have is what your parents feel like doing, the tax benefits aside. Will they ever want to use this house for any purpose ever again? Will they feel like you manipulated them if you take the tax benefits for yourself?

    If they don't want the house ever again and would be happy to gift it to you, then that's fine. But the point is, if that's not really the way they understand the situation, we're not talking about an earth-shattering tax break here.

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