Mortgage interest on the trust loan is deductible
Q: I have found a house that I want to buy and the plan is to borrow money from a family trust. I will live in the house with my family. My older brother is the trustee and he already said he would approve the loan so I can get the loan funded immediately with no credit approval delay. I can also avoid a house appraisal. My only problem to solve is to make sure that I can deduct the interest on the loan. This is not a freebie – I will repay the loan over 15 years at an interest rate of 2.75%. The trust has several family members as beneficiaries and my brother made it clear that the trust needs to be repaid. So I need to know if the fact that a bank is not the lender makes a difference in my ability to deduct interest?
A. No. The identity of the lender has no bearing on the deductibility of interest. There may be model facts where a family relationship raises a question about the good faith nature of the loan, but you are strongly suggesting that it is a good faith loan.
You can deduct interest if it is considered paid on “qualifying residential debt”. Qualifying residential debt includes a loan to acquire a residence provided the loan principal does not exceed $ 1 million and the loan amount does not exceed the fair market value of the home.
A final requirement is that the loan be secured by the residence and that the collateral be perfect in accordance with the requirements of local law. This would require that the loan be registered.
Since your brother has a fiduciary responsibility to the other beneficiaries of the trust, one would expect him to use a note and a mortgage, and register the mortgage.
As long as you use this house as a residence and there is a registered mortgage, you can deduct the interest on Schedule A of your return (as an itemized deduction). Note that I am assuming that the loan amount will not exceed $ 1 million or the fair market value of the house.
Q: My wife retired from the state of New Mexico on September 1, 2012. In requesting her retirement, she filled out the New Mexico Public Employees Retirement Association (PERA) form titled “Retirement Request” . In the “Designation of beneficiary and method of payment” section, we decided that she would check the block for a single life option for her life only and that the payments would stop when she died. He was diagnosed with pulmonary fibrosis, a terminal illness. She also suffered significant heart damage from pulmonary fibrosis, which required a pacemaker. We lost her to illness a year ago, in January 2015. During her years of employment in the state of New Mexico, $ 26,305 was taken from her salary, after tax, for his retirement. She received four retirement payments in 2012, 12 payments in 2013, 12 payments in 2014 and one payment in 2015, for a total of 29 payments. His last payment for January 2015 was $ 1,295. The simplified method worksheet was used to calculate the taxable amount of his retirement income. $ 405 was recovered in 2012 and $ 1,503 was recovered in 2013 and 2014. The total recovered is $ 3,411. $ 22,894 was not recovered ($ 26,305 to $ 3,411). I’m preparing our 2015 tax return and need to know what to do with the $ 22,894 in unrecovered charges. In addition, am I required to file “unique” when I file the 2016 income tax return?
You correctly used an annuity exclusion ratio, based on life expectancy, to recover the after-tax cost of his PERA contract.
Because it is based on life expectancy, it is an “estimate” that must be adjusted when payments do not match the estimate.
The unrecovered base is a deduction on the 2015 return. This is a miscellaneous itemized deduction, but is not subject to the 2 percent AGI calculation.
You could simply call it “base not recovered in annuity”. Make sure it is entered on line 28 of Schedule A so that it is not reduced by 2% of the AGI.
And you will drop single in 2016 (but MFJ in 2015).
James R. Hamill is the Director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at [email protected]