Christmas and Hanukkah is just weeks away. You’ve been thinking about a lot of things you can buy others? As a Realtor in Southern California, I rarely hear of someone who has truly reached 100% ownership of their own home. Of course there is a strategy that dictates having a mortgage is a good strategic move (especially with the low interest rates we have enjoyed for the past 8 years. However, owning your home comes with added benefits. So, if you’re in a position to do it, paying off the home of a family member can be one of the biggest gifts you could give. To a younger couple, a home mortgage can be a weight on their shoulders. Paying it off for them is definitely the ultimate act of charity. But understand there are things you need to be aware of when it comes to paying for someone else’s mortgage, the process isn’t entirely straightforward. Here’s a couple of things you’ll want to know.
Craft a Solid “Gift Letter”
Before you consider paying off a family member’s mortgage, be ready to put together a formal gift letter with the actual payment you’ll be making. If you don’t, your “gift” may be construed as a loan. Which is seen and accounted for differently (and not necessarily your favor). A gift letter basically says, “I/we are giving money to a relative to help them with their mortgage”. One thing you will need to clearly communicate is that you have no intention of seeking repayment or ownership stake in the property.
Gift Tax May Put A Kink In Things. Be Ready for It.
As of 2016, you cannot give a gift of more than $14,000 annually (up to $5.43 million over a lifetime) to any one person without being taxed by the government. Be prepared to create a strategy to avoid or minimize taxes. After all, your goal is to help a relative, not line the pockets government (they make enough from you in other ways).
You May Not Be Able to Claim Interest Expense as Tax Deductible
One of the main advantages of having a mortgage is the ability to write off interest expense. However, paying someone else’s mortgage doesn’t transfer interest expense deduction to you. Only the homeowner can take advantage of it. So, if you feel the urge to help someone pay their mortgage off, don’t claim the interest on your taxes.
Paying off a friend’s or relative’s mortgage is a fantastic gift. It not only makes you feel good, but can change the trajectory of those who receive your good will. It may absolve them of the largest debt they have. The thing I recommend is for you to evaluate what stipulations and other legal and accounting steps you need to take to ensure what you do is done properly.
If you have any questions about mortgages or buying and selling Real Estate, Give me a call at (562)618-9770.
Dave Harbison has been a Real Estate Practitioner in Long Beach and surrounding communities for over 10 years. He regularly contributes to blogs, news outlets and other media, providing insight to home owners, buyers and sellers in the Long Beach, Seal Beach, Lakewood, Sunset Beach, Huntington Beach, Newport, Cypress and Cerritos.