Tax Breaks for Shared Housing?

OUR READERSWho: Linda and Harry SchwandtWhere: Fairless Hills, Pa.

Question: Our daughter, son-in-law and two grandchildren moved in. What about the taxes?

About two years ago, Harry and Linda, their daughter, Amber, and her husband, Luke, began tossing around the idea of moving in together. At first, it was discussed “in a joking manner,” Harry says. But the more they talked about it, the more sense it made for all concerned.

Harry, an insurance underwriter, wanted to cut his expenses so that he can afford to retire within the next 15 to 18 months. Amber and Luke wanted more space for Tyler, 8, and Angie, 3. They considered a larger home but feared they wouldn’t qualify for a low mortgage rate. Luke is self-employed, and “banks are tough on independent contractors,” Harry says.

So Harry and Linda added a master bedroom, bath and sitting room, and in May, the young family moved in. The couples are splitting all expenses, including real estate taxes and the monthly mortgage. The Schwandts are considering adding Amber and Luke to the deed of the house. Come next April, though, they’re not sure how to report the new arrangement on their tax returns.

A legal obligation. Unfortunately, Amber and Luke won’t be able to deduct any mortgage interest. They would have to be legally responsible for the payments, says enrolled agent Linda Bleil, of Pittsburgh. Putting Amber and Luke on the deed to the home won’t create that obligation. “Harry and Linda are the ones who signed the mortgage note,” Bleil says. “They’re the only ones who promised the bank they’ll repay the loan.”

However, all is not lost for Amber and Luke in terms of tax savings. If their names go onto the deed, they’ll be allowed to deduct their part of the real estate taxes. First, though, Harry and Linda should ask their lender whether the terms of their mortgage will allow them to add their daughter and son-in-law to the deed.

Adding family members could also raise gift-tax issues. In 2012, Harry and Linda could give Amber and Luke a total of $52,000 in cash or other assets. But if half the value of the house exceeds that amount, the excess would be a taxable gift. A gift-tax return would have to be filed, but no tax would be due because current law provides a credit to cover the first $5.12 million of taxable gifts ($10.24 million for married couples).

There is a way around the tax issues. Instead of paying half the mortgage, Amber and Luke could pay for nondeductible expenses -- food, utilities, insurance and maintenance -- to even out the bills. If that means they claim the standard deduction instead of itemizing, that might be an additional benefit. The law forbids one spouse from claiming the standard deduction if the other itemizes. But with two couples living together, one can claim the standard deduction and the other can itemize.

Taxes aside, everyone says the move is a success. Linda helps with the grandchildren, and the extended family eats together several times a week. The family has always been close -- Harry plays golf and poker with his son-in-law -- and that makes all the difference, Harry says.

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This article first appeared in Kiplinger's Personal Finance magazine. For more help with your personal finances and investments, please subscribe to the magazine. It might be the best investment you ever make.