Real Estate Investor · Ontario, CA · Member since 2016 · 7 posts · 2 votes
I'm thinking of doing a subject to deal. If I continue to pay the mortgage in the the seller's name (with out refinancing) would they claim the mortgage interest tax deduction or do I get to claim that since I am paying the mortgage and hold the deed to the property.
@Mike Sivert You are entitled to take the deduction for mortgage interest, property taxes, insurance and anything paid out of escrow, assuming your sub2 deal is written appropriately. An appropriate sub2 deal is one that properly conveys the burdens and benefits of ownership to you (there are 7 tests of this per precedent and case law).
Assuming you meet those tests (which you likely do if you used an attorney), you are entitled to the deductions. Reporting the mortgage interest on the return should be done with care, as the IRS does not have a copy of Form 1098 under your SSN (or EIN if business) reporting the interest. There is a special way to report it to get the deduction while not triggering a computerized notice from the IRS disallowing the deduction. Be sure to consult a real estate CPA that is familiar with the process and knows how to properly deal with sub2's / land trust type deals like yours.
Your seller should also be of the understanding that they are NOT taking the deduction. It is good practice to obtain from them the actual 1098 and to remind them that they are no longer entitled to the deduction since they aren't making the payments anymore (again, these things are usually spelled out in the sub2 agreement).
Happy to help if you have any other questions about the process. I deal extensively with creative financing such as sub2's, land contracts, contract-for-deeds, assumptions, land trusts, etc.
@Mike Sivert You are entitled to take the deduction for mortgage interest, property taxes, insurance and anything paid out of escrow, assuming your sub2 deal is written appropriately. An appropriate sub2 deal is one that properly conveys the burdens and benefits of ownership to you (there are 7 tests of this per precedent and case law).
Assuming you meet those tests (which you likely do if you used an attorney), you are entitled to the deductions. Reporting the mortgage interest on the return should be done with care, as the IRS does not have a copy of Form 1098 under your SSN (or EIN if business) reporting the interest. There is a special way to report it to get the deduction while not triggering a computerized notice from the IRS disallowing the deduction. Be sure to consult a real estate CPA that is familiar with the process and knows how to properly deal with sub2's / land trust type deals like yours.
Your seller should also be of the understanding that they are NOT taking the deduction. It is good practice to obtain from them the actual 1098 and to remind them that they are no longer entitled to the deduction since they aren't making the payments anymore (again, these things are usually spelled out in the sub2 agreement).
Happy to help if you have any other questions about the process. I deal extensively with creative financing such as sub2's, land contracts, contract-for-deeds, assumptions, land trusts, etc.
I have a sub to like question along the same lines.
I own a STR that is performing well (30% COCR) and I want to scale my business.
My parents own a few properties in cash. I was looking into partnering them leveraging their capital and getting a loan. However, they dont want to be anywhere near the loan or title because they dont want any lawsuit liability from my STR.
With my income and credit score, the terms for DSCR loans or conventional investment are not good.
They own their primary residence in cash and its value is around 2 million. We were exploring taking out a primary mortgage on their home to take out 350k in cash at about a 6% interest rate, and I take out a loan from them at an equal rate or slightly higher (maybe 6.5%). Id purchase my investment property in cash with the 350 k loan. They are cutting me a good deal and I am grateful.
How does the mortgage interest work here? I assume I can deduct it, they cant and they pay tax on the difference in interest between the primary mortgage and my personal loan with them?
First, this is not a sub-to situation at all. It's straightforward private lending.
Second, your situation is simple. As long as the money you borrowed is used to buy an investment property, your interest is deductible against this property. Does not matter from whom you borrowed and where they got the money to lend you.
Third, their situation is potentially problematic. They certainly owe taxes on the 6.5% interest they receive from you. Whether they can offset it by deducting the 6% interest they pay to the bank depends on whether or not they itemize their personal deductions. It is entirely possible that they are stuck with taxes on the entire 6.5% and not just on the 0.5% difference. Proceed with caution.