They’re entitled to a write-off

Question: We recently purchased our first home. On the advice of our mortgage consultant, we obtained an interest-only 100% mortgage in our father-in-law’s name because our credit isn’t good. All our names are on the title, but not on the mortgage. In six months, my father will sign a quitclaim deed to remove his name from the title. Can my husband and I claim the tax deductions on the house although we are not listed on the mortgage? We will be making the payments. To do a quitclaim deed, must we refinance the mortgage in our names at that time?

Answer: Because your names are on the title to your personal residence, you are obligated to pay the mortgage and taxes or lose the property by default. Therefore, you are entitled to claim itemized income tax deductions for the mortgage interest and property taxes you pay.

Your name need not be on the mortgage. Millions of U.S. homeowners own their homes subject to an existing mortgage that is not in their names. But they are the “beneficial owners” entitled to the itemized tax deductions for the mortgage interest and property taxes they pay.

However, you should get your father-in-law to sign and notarize the quitclaim deed now so it will be ready for recording (just in case anything should happen to him).

Renting a room won’t alter status

Question: Does renting a room in my home turn my principal residence into rental property and cancel the $250,000 tax exemption when I decide to sell?

Answer: No. Renting a room in your principal residence affects only the rental portion, which becomes ineligible for the Internal Revenue Code 121 tax exemption up to $250,000 (up to $500,000 for a qualified married couple).

However, at the time of home sale, any depreciation you deducted for the rental room is recaptured and taxed at the special 25% federal tax rate.

TIC investors sacrifice control

Question: Are tenancy-in-common investments a good deal? I currently own a rental property worth about $1 million, with $800,000 in equity. My current net cash flow is about $11,000 per month. Do you recommend TICs or an independent Internal Revenue Code 1031 tax-deferred exchange into a larger building to increase my cash flow?

Answer: Your $132,000 annual cash flow on the $800,000 equity is a very poor return. If you make an Internal Revenue Code 1031 tax-deferred exchange into a TIC (tenancy-in-common) share of a large income property, such as an office building or a shopping center, you are at the mercy of the TIC syndicator and property manager who may be very good or very bad.

Check on the success record of the TIC company. Many have been in business only a few years without much of a track record. You should also check on the quality of the commercial property tenants.

For example, I know TIC investors who are very happy with their investments in several restaurant buildings where they have been receiving monthly checks for more than 10 years. But I also know a TIC investor in another restaurant chain’s building where the tenant filed for Chapter 11 bankruptcy protection and canceled the lease on the now-vacant restaurant building.

Of course, you can instead make an IRC 1031 tax-deferred exchange into a larger income property with better cash flow. Then you get to manage and control the entire property, although I can’t say which is your better alternative.

Capital gains clock starts up at closing

Question: Does the 12-month long-term capital gains period for real estate begin to run when a firm purchase contract is signed by both parties, or does it start on the date of the actual closing of the sale?

Answer: The 12-month long-term capital gains real estate holding period starts when the buyer becomes the owner with rights and obligations. This is usually the date the sale closes and the deed is recorded. The date the purchase contract was signed is irrelevant. For full details, you should consult your tax advisor.

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Letters and comments to Robert J. Bruss may be sent to 251 Park Road, Burlingame, CA 94010, or go to www.bobbruss.com. Bruss suggests that you consult an attorney or tax advisor before making important real estate decisions.