Can in-law deduct some mortgage interest?


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Dear Tax Talk,
My wife’s sister wants to move into our house and has agreed to pay one-third of the mortgage. What needs to be done for her to be able to deduct one-third of the interest from her federal income tax return? We will be purchasing our retirement home very soon.
— Frank

Dear Frank,
In order for your wife’s sister to be able to deduct any of the mortgage interest she pays, she is going to have to be made a co-signer on the mortgage loan. This means that she will need to be legally responsible to the bank. You will need to work this arrangement out with her and the bank.

Once she is a co-signer on the loan and has made mortgage payments during the course of the year, you are going to need to allocate the annual interest between her portion and your portion. To get the deduction, she will need to itemize on Form 1040 Schedule A. When claiming her portion of the mortgage interest, she will need to determine if she is better off taking the standard deduction rather than itemizing her deductions. The standard deduction may be higher than the itemized deductions.

Keep in mind that there are limits on how much mortgage interest you can deduct on your return. The amount of mortgage interest that can be deducted depends on when the mortgage was taken out, the amount of the mortgage and how the mortgage proceeds were used. You can deduct mortgage interest paid on your main home and a second home. Internal Revenue Service Publication 936, Home Mortgage Interest Deduction, has flowcharts and worksheets to help you calculate the mortgage interest deduction that best fits your situation.

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