DEAR BENNY: Our son worked for one company for 23 years until he was laid off about three years ago. He and his wife sold their home and bought a large Victorian home down south, did extensive remodeling and now have a bed-and-breakfast and tea room. They have a mortgage on their home and since they do not have much income yet from their new business venture, we have been paying their mortgage payment.
It appears that because our son doesn’t have much income, he won’t be able to take the mortgage interest deduction, and because we aren’t on their deed, we can’t either, which brings us to our question.
What would be the best way for us to take the interest deduction?
- Mortgage our home, which is fully paid off? We don’t want to do that.
- Have our names added to their deed as co-signers? Would that entitle us to take the deduction, and if so, what is the best way to do that?
- Purchase their home, which probably entails all of the costs that go with buying a home?
We feel that one of us should be able to take the interest deduction, and by the way, we have not given them more than is allowed as gift. Perhaps none of these options is good and we would appreciate your advice. –Dean
DEAR DEAN: Although there are some exceptions, the general rule is that only the owner who pays the mortgage has the right to deduct for tax purposes the mortgage interest.
I do not scoff at the value of this tax deduction, but many homeowners overplay its significance. For example, one of your suggestions was to take out a mortgage on your current home. You properly rejected this. It would not benefit anyone.
Let’s say you took a mortgage of $100,000 at today’s low rate of 4.5 percent. For a 30-year loan, your monthly payment would be $506.69. The interest you could deduct for the first year would be slightly less than $4,500.
Even if you were able to deduct this amount in full (which you cannot because it depends on what tax bracket you are in), you will have paid the lender more than $6,000. It makes no sense to pay more to get a small tax deduction.
Should you add your name to their title? You can do this, but there may be gift tax consequences unless you are buying a portion of their business. In that case, there will be other tax consequences. More importantly, why not let your son build up his business on his own?
Should you buy his home outright? Once again, you will have to pay a lot of money just to get a tax deduction.
We often get overexcited about the value of the mortgage interest tax deduction. Yes, it’s a valuable tool, but in my opinion, it’s not for you.
If you really want to help your son, lend him some money and have a deed of trust (mortgage) recorded against his property. Perhaps with that additional cash, he can build up his bed-and-breakfast through more advertising and promotion, and will ultimately be able to take advantage of the tax deduction on his own.
DEAR BENNY: I own one-half of a duplex apartment building in a real estate partnership. My partner lives in one unit and I live in the other. My partner is considering retiring soon and has indicated that he may want to sell. If he does, will I be forced to sell my 50 percent interest? –Deb
DEAR DEB: Any time you enter into a partnership with anyone — friend or stranger — you must have a written partnership agreement spelling out situations like Deb has raised.
In Deb’s case, if there is no partnership agreement, she and her partner will either have to agree on how to resolve the situation or the property will have to be sold to a third party.
There are a number of possible solutions. Deb can buy the other half from her partner. She can either pay cash, or have the partner take back financing. Assuming there is a mortgage on the property, Deb can take it over with the lender’s permission.
I suspect that since Deb is also on the mortgage loan, and if there is a good payment history, the lender will allow Deb to take over the entire loan.
With luck, her partner can find a buyer for his half of the duplex. Can Deb object to any such buyer? In the absence of a partnership agreement — or if her partner understands her concerns — the answer is probably no.
The partner can be convinced to rent out the property for a few years, thereby avoiding the complications of a sale. Once again, (in the absence of any written agreement) Deb’s ability to object to any such renter depends on her partner’s willingness to cooperate.
As you can see, a written partnership agreement would spell out as many of these contingencies as possible, including issues such as (1) what happens if one partner dies? (2) what happens if one partner cannot make his/her share of the monthly mortgage payments? and (3) what happens if one partner wants to sell and the other does not?
You don’t necessarily need a lawyer to draft such an agreement, but a real estate attorney will have other suggestions to meet your individual needs and requirements.
The time to resolve issues is when the two partners are friendly and talking to each other — i.e., before you buy the property.
DEAR BENNY: I live in a small, 15-unit condo complex. As you can imagine, we have various restrictions on what homeowners can do to the exterior of their units. I understand, though, that there is a federal law regulation that permits residents (even non-owner renters) of multi-unit properties to install satellite dishes for TV reception even if the CC&Rs prohibit such exterior devices. Is that true?
If so, is there any option for the homeowners association to prevent the random installation of those dishes, which in my opinion are unsightly? –G.O.
DEAR G.O.: Before I respond to your specific question, I want to repeat — once again — my favorite pet peeve: Don’t call a condominium a homeowners association or vice versa. You initially said you live in a condo, but made reference to your CC&Rs (covenants, conditions and restrictions).
In a condominium, the legal documents are generally the declaration and bylaws and any rules and regulations promulgated by your board of directors.
In a homeowners association, on the other hand, the legal documents are generally the CC&Rs.
There is a difference between the two legal entities, and people who live in a community association should use the proper terminology. More importantly, don’t call yourselves "tenants."
Now, back to your question. Back in 1966, Congress enacted the Telecommunications Act of 1966, which directed the Federal Communications Commission (FCC) to adopt a rule regulating "over-the-air reception devices," referred to in government language as the OTARD rules.
According to these rules, if you as a homeowner have exclusive use in your unit (or house) in which to install the antenna, which includes satellite dishes, your association cannot prohibit this.
What is "exclusive use"? In a condominium, for example, there are three basic elements: common elements, units and limited common elements. The common elements include such areas as the entrance lobby, the roof, any elevators, and all mechanical equipment that services the entire complex.
Your "unit" is the "box" in which you live, defined as wall to wall and floor to ceiling.
A limited common element (LCE) is something that, while not within the unit, is not accessible to all unit owners. The classic LCEs are parking spaces and decks and patios. Only you (or less than everyone) can use it.
According to the FCC, the OTARD restrictions apply only to those areas of exclusive use. But, for example, if you have to drill through exterior walls (i.e., common elements) to install your satellite dish, the rules do not restrict your association from prohibiting this.
Furthermore, the rule does not prohibit your association from restricting antennas or dishes that extend beyond the balcony or patio, because that space is a common element.
It’s not really confusing, but a good source of information can be found on the FCC website at http://www.fcc.gov/mb/facts/otard.html.