Gift of mortgage payment?

It seems about right. The devil is in the details, though.

Well, one of you has to pay income tax on the unpaid but imputed interest. It can be him from the standpoint that he has cancellation of debt income. Or it could be you because the payment was supposed to be made to you.

I concluded pretty much the same thing but did not comment here before Stu's posting.

If my son's tax bracket is the same as mine, either transaction is tax neutral as far as the IRS is concerned. If I five him a check for the payment as a birthday gift, he ends up with an interest deduction for the interest. I end up with interest income. If I just gift that month's mortgage payment, I do not get the income and he does not get an interest deduction.

If we have different tax brackets, the transaction is not tax neutral as far as the IRS is concerned.

In the set of facts you promulgate, there is no difference in the two methods. You report 12 months of income, he gets to deduct 12 months of interest.

I would recommend giving him a gift to pay down the principal. Depending on how your loan is structured, this would either reduce his monthly payment or reduce the number of months to pay off the loan.

Excellent suggestion. In that case there would be no imputed interest on the gift.

There is probably no issue when dealing with one month. But always keep this in mind. The IRS presumption is that every family loan is a gift in disguised. It is the arms length structure of the loan, the managing of the loan, the actual payments and the actions taken if the borrower starts to default that defeats the IRS presumption.

As an example.... if the father gifted an amount every month such that the child didn't make any payments, the IRS would probably argue that the original loan was a disguised gift.

Yes, the loan must be proper and documented. However once that is done, making a gift by writing down principal does not involve fiddling with the loan, and does not involve anything having to do with interest. So it's a much cleaner, tax-wise way to go about it.

but would they win? there is no requirement that the father CONTINUE such monthly gifts.

There is a periodic publication by the IRS for minimum interest rates to be charged to prevent a loan from being a "family loan." This exercise leads me to several points.

1. If marginal income tax rates are the same for borrower as for lender, the net revenue collected by the IRS is unaffected! Whether interest rate is zero or 20%, there is no no increase or reduction in collected tax.
2. If tax rates are differ, then there could be some collusion as to reducing total tax paid a sort of arbitrage.
3. To avoid this possibility, we have a regulation and routine that just makes tax matters more complicated than necessary just because IRS computers can now keep track of such things. This includes publication of pages and pages of required minimum rates.
4. It discourages gift giving.

No, but if it appears that it was all set up to run that way from the beginning rather than decided month by month, the IRS can certainly win.