Q: My wife and I live in New York City. We have purchased a house in Virginia for my daughter and son-in-law to live in. All our names (my wife, daughter, son-in-law, myself) are on the deed and mortgage. Presently, my wife and I are making the mortgage payments and plan on taking all the tax deductions. Eventually, our daughter and son-in-law plan to buy our interest and become sole owners of the house.
Here are my questions: First, is it all right for my wife and me to take the tax deductions if we make the mortgage payments? Second, how can my daughter and son-in-law share in the payments and deductions when they desire? Third, how can they compensate us for our investment when they want to take over entirely?
A: First, since you and your wife are making the mortgage payments and are part owners, the Internal Revenue Service agrees that you can take the proper deductions on your income tax return if you itemize deductions on Schedule A, Form 1040. From the information you've given me, I infer that your deductions will be limited to mortgage interest and real estate taxes. Second, as your daughter and son-in-law desire to share in paying the mortgage payments, they can do so by agreement with you. Then they can take a proportion of the deductions on their income tax return equal to the proportion of the mortgage payments they make. Both you and your wife and your daughter and son-in-law should keep adequate records of the amounts of your mortgage payments so that you can support your tax deductions.
Third, your daughter and son-in-law can compensate you and your wife any way you agree. For example, they can repay you monthly or at any other interval, or in a lump sum. But unless you establish your mortgage payments on the house as a loan to them, these payments to you may be taxable income. When you've been fully compensated (or at any other time you agree) you and your wife can convey your interest in the house to your daughter and son-in-law. See your attorney and tax advisor for details.
Q: An investment house I own has a deed of trust indicating that if equitable title is acquired by any person, the note becomes due and payable at the option of the lender. Has this "equitable title" clause been tested in Maryland?
A:this clause has not been tested in Maryland -- nor in Virginia or the District of Columbia, as a matter of fact. In several other states it has been tested in litigation and held to be unenforceable.