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Sorry if this is the wrong place for such a question, but I couldn't see another more relevant choice.
I am a Canadian who owns a house in a US city. Legally the property is in my son's name, and so is the mortgage, because being a US resident, he was able to qualify as a home owner. So, he signed the mortgage papers for us and in exchange we gave him $3,000 cash. He has nothing to do with the rental business, we pay the mortgage every month and collect the income, and maintain the property 100%.
Because it's a rental property, this has affected his taxable income to his advantage. Last year he would have owed the IRS money but our rental property caused that to be negated. This year it's made a refund of several thousand $'s.
Before buying the house, we told him that we would cover any losses completely, should he end up having to pay more tax. We assumed if there was a credit, we would split the part that our house was responsible for, 50/50.
My question is - what do you think is a fair split?
Hmmm....Business dealings with family can be complicated, eh?
While a 50/50 split may be "fair", your situation raises a lot of questions and a lot of red flags. Basically, your son owns a house upon which he obtained a mortgage to purchase it. You have a handshake agreement whereby you have agreed to cover all of his costs.
First off, what type of mortgage was received? Did he purchase the house under the guise of it being his principal residence? And if he is treating the house as a "rental property" on his federal income taxes, how is he showing any rental activity if you are handling all of the money? He may be claiming depreciation on the property, but there should be a corresponding business activity with a "rental". The depreciation will reduce the basis in the house--so once it is sold a larger taxable profit would likely be the result, and he will owe taxes on that amount.
I'd also inquire as to how you are treating the rental income...but I'll let that slide. With both the U.S. and Canadian taxing authorities in play, I don't envy your situation--it's sounds too complicated and perilous to my liking.
x2 on what Manderly6 just said. No profit has been realized, nothing has been earned. This is just tax advantage. He does not even have to take that as a refund. Depending on how he files and what his income is, he could as easily just apply it to next year's taxes.
Since you have nothing in writing with your son you should maybe try not to rock the boat with him. Or actually sit down with him and discuss the situation and try at this late date to get some sort of written agreement with him about the house.
What's fair with you keeping all the rental income when it's your son who is risking everything for having the loan in his name? You're keeping the rental income, he gets to have the tax advantage. You need to put something IN WRITING for what will happen when you sell the house.
I'd say if the house is generating some profit over expenses and your son gets a tax write off, then the deal is equitable. Presumably, you have in writing what the split will be when the house is sold?
If I was the son.............I would say to my dad......
"Every year what I owe in taxes will vary on quite a few scenarios. Marriage, income, children, tax credits, etc, I do not wish to go over multiple tax scenarios with you or with an accountant together about my personal finances each year. I entered this agreement with you because at great personal risk, it would benefit me and also benefit you. I would ask you to just leave the tax situation alone. If you can't let it go, I would gladly step away from this whole deal and we can sell the property.
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