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morrowone · Joined: 28 Jul 2008 Posts: 2 2.02 Dollars($)

Hello,

What is the best method to take over my in-laws mortgage which they can no longer afford?

Both of my in-laws are retiring, and they can no longer afford the existing mortgage on their house. They offered to give us the house so long as my wife and I can make the payments, which would be no problem for us.

My biggest concern is that I want to be able to reap the tax benefits of home ownership (in other words I want to be able to legally claim the interest paid on the house for income tax purposes). If we were to just pay their existing mortgage on their behalf without doing any paperwork, would I be able to claim that on my taxes?

If the answer to that question is "no", then what is the best, easiest, and cheapest method for doing this?

I am trying to avoid having to refinance, because this will obviously cost a lot (plus I'm not so sure I can qualify being that I currently own a home already). There are no trust issues at all with this situation so any scenario would work.

Any and all advice would be greatly appreciated. Thanks!

kpatrick · Posted: Mon Jul 28, 2008 6:59 pm Post subject:

Hi Morrowone,

This is kinda convoluted, and a real estate atty or a CPA might be your best bet to answer your questions. But off the top of my head, I would say that your in-laws should quitclaim half the interest to you, and that way you secure your interest since you will be paying the note. ( I know you said there are no trust issues, but stranger things have happened.)

I would probably structure this as a "rental home", because then you can write off all your expenses on the home. (lawncare, repairs, upgrades, mileage, etc) Normally, with a rental home, you also claim the income, but since there won't be any...I don't really know about this part. The last thing you want to do is raise red flags with the IRS, so again, this is where a good CPA comes in.

And regarding the mortgage interest, I believe you should be able to claim it --just be sure your parents aren 't also claiming it. Again, this would be a good question for the CPA.

Kim

Jessica

Hey Kim, I think the person claiming tax deductions should be on title as well as the loan, isn't that so? or has the rule changed?

Morrowone, I don't think you can get tax deduction on the interest simply by paying off your in-laws mortgage. As Kim said, you need to be on title. And as I understand, you'd have to be on the loan as well. In most cases where people pay for their parent's loan, they look forward to a refinance. But as you say, you may not be able to afford it. So, I think you should have a straight talk with the lender as to whether he'll agree for a Novation .

Regarding tax benefits, you may check out the information on criteria for mortgage interest deduction .

Regards,

Jessica.

Posted: Tue Jul 29, 2008 5:54 am Post subject:

Jessica's right...a novation may be your only chance without refinancing.

morrowone · Joined: 28 Jul 2008 Posts: 2 2.02 Dollars($)

Thank you all your replies. From what I gathered, a novation is probably the best route to take.

I do have a few questions regarding novation through:

1. What is the difference between novation and assumming a loan?
2. What is the process to go about novation?
3. How common is novation, and what is the likelihood of Indymac bank approving a novation?
4. Will I have to qualify for a novation? In other words, does my credit need to be checked?
5. Are there generally fees involved when doing a novation? If so, how much?

Thanks again for any and all answers!

larry · Joined: 27 Jun 2007 Posts: 3322 474.67 Dollars($)

Hi Guest,

Welcome to the forum.

Novation is a process to transfer mortgage in all party's agreement.

Loan assumption: Loan assumption is a process which occurs generally in home buying. The buyer can assume the loan of the home buyer.

"3. How common is novation, and what is the likelihood of Indymac bank approving a novation?"

Nowadays lenders don't accept the novation always and it totally depends on the mortgage company whether they will accept it not.

"4. Will I have to qualify for a novation? In other words, does my credit need to be checked? "

Yes your credit will be checked and you will have to qualify for novation.

Best of luck,
Larry

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