Main Home vs. Second Home

For interest, you get your main home plus one other. For property taxes, you get all your property.

Therefore, it's not a matter of the rules. You each get to deduct what you actually pay since you both owe it.

One tax implication, if you do the deal as described, is that you could trigger gift tax on the economic value that you are transferring to her. You may not have to pay any current gift tax but it will count against your lifetime credit if the economic value is above the annual exclusion.

Steve

But how do you determine what you actually paid? Here's a breakdown of a sample payment:

$714 interest $216 principal $69 PMI $146 property taxes $39 insurance =========$1184 total

But of that, only the interest, PMI and property taxes ($929 total) are tax-deductible. So if I pay $592 and my friend pays $592, how do we decided who paid what? For example, can we decide that ALL of my half of the payment went toward interest? That's a better use of the deduction since I'm in a higher tax bracket than my friend. Does this make sense?

Thanks, Bill

You split the deductions 50/50. That is how you split the payments.

Nope. Because you paid HALF of each payment, you can only deduct HALF of the interest and taxes.

You don't get to pick and choose your deductions.

It might to you, but it doesn't to the tax guy.

There are ways to make this work. Like you making the house payment and your friend paying the groceries, utilities, and other expenses till you feel it's even. Since you paid the mortgage in full, you get the full expenses for property tax and interest.

That is a doable, and often used tax planning tool in situations like this, or a hi-lo income couple filing MFS, or a host of other potential scenarios.

If I understand, the underlying economic reality doesn't have to change, but if you do some extra record-keeping and calculating, the higher-AGI taxpayer can arrange to claim the larger portion of the deductible household costs, if there are enough other (non-deductible) costs paid by the lower-AGI taxpayer to keep the overall contributions from each in balance.

Records would include the ownership of the checking account which made the payments to the bank, (and possibly where the money came from that went into the account?) and accounting if necessary for gifts made to each other in the form of household expenses. Might require filing a gift tax form, usually with no actual gift tax ramifications now if ever.

-Mark Bole

With that example, you each paid half of each item.

In addition to all the other excellent posts here, is it recommended to file a fom 1065? It looks like a pretty formal business type form, so I imagine it is not needed.