Question: I am planning to buy a home for my parents to live in. I have no intentions of living there nor do I intend to collect any rent on the property. Will I be able to get a home mortgage for this or will it be considered investment real-estate?
I live in MA and the future home is in Ohio. What kind of taxes am I setting myself up for? Will MA charge me property taxes on something in Ohio?
I have read several tax books but nothing obvious addressed this issue. The property is not rental property nor is it commercial property. Apparantly no one buys a house that they do not intend to live in nor rent. If it is not a second home then I believe that it must be residential property.
Are there any special tax deductions with this sort of arrangement? For me it will be a net loss— if it were not for my parents, I would not even consider such a purchase.
Would I be ahead tax wise to consider it as rental property and take a net loss because I did not rent it?
Answer: 1) It can be treated as a second residence as long as it is not rented or used for other business purposes during the year. It sounds like you could deduct the interest as home mortgage interest.
2) If it is not rental property, you cannot take a rental loss. This happens a lot here in Florida: children purchasing homes in which their parents will live. We are able to routinely secure loans for these properties as second homes. You wouldn’t even need to state that anyone is going to live in the house. Find a good mortgage broker in Ohio and hash it out. I assume that you are asking the tax question, “Does this qualify for the home mortgage interest deduction?” and not the banking question “Will I qualify for a residential mortgage _rate_?” As to the tax question, if you own any dwelling and do not rent it out at any time during the year, it is generally considered to be a “residence” for purposes of the qualified residence interest deduction. In any given tax year, you can choose one such residence, in addition to your principal residence, to treat as a “qualified residence” eligible for the deduction (though there is a glitch if you are married filing separately). Massachusetts itself does not levy any property taxes on individuals — you pay your property taxes to your locality. In any event, neither the commonwealth nor your city or town will charge you property taxes on out-of-state realty. You will be liable for whatever real property taxes are charged wherever the house is in Ohio.
If you charged rent on the property, and had a net income from it, both Ohio and Massachusetts would tax you on that income, although you would get a credit on your Massachusetts return for some or all of the Ohio income tax paid.
Finally, if and when you _sell_ the property, both Ohio and Massachusetts (if you still live in Massachusetts) may want to tax you on the capital gain. Again, though, you get a credit to your Massachusetts taxes that should prevent double taxation.
Filed under: Mortgage Question