If a corporation buys a house, can its shareholders use the tax deductions from interest paid on the mortgage?
Posted on October 5, 2008 by admin
chrissnively asked:
I am looking to buy two houses for use by me and family members. I would issue shares to me and two other members of my family. If I were to die, they would get the shares equally. I am hoping to do this to avoid paying taxes on the transfer of the houses from my name into theirs. Additionally, would the shareholders be able to use the companies deductions for mortgage interest in order to lessen their tax burden? Basically I am about to buy two houses, and I am looking to minimize the tax burden of passing the houses on upon my death.
I am looking to buy two houses for use by me and family members. I would issue shares to me and two other members of my family. If I were to die, they would get the shares equally. I am hoping to do this to avoid paying taxes on the transfer of the houses from my name into theirs. Additionally, would the shareholders be able to use the companies deductions for mortgage interest in order to lessen their tax burden? Basically I am about to buy two houses, and I am looking to minimize the tax burden of passing the houses on upon my death.
Nope. The corporation is the owner of the homes and gets all deductions appertaining thereto.
You’d also have to pay a fair market rent to the corporation.
All in all, this is a bad idea.
Let’s see, you want to come up with a creative way to avoid having taxable gifts?
This is not the way to do it. As co-owners, they have to actually pay their share of mortgage interest and property taxes in order to deduct them on their taxes. If you pay it all, they can’t deduct the money and neither can you.
You can’t even call this rental property and have everyone file a schedule E since the renters will be related parties.
Very bad idea. You could be creating multiple tax traps such as having to pay tax on the appreciation when you transfer the houses at your death, not receiving a step up in basis on the real estate at your death. having them reassessed for (California) property tax at your death (if you are in California), not being able to use the $250,000/$500,000 exclusion on sale of residence if they are ever sold. I suggest that you talk to a probate attorney and set up a living trust. The advantages of that (in California) would be: Deductible mortgage interest, lower interest rates on conventional mortgages (which a corporation may not be able to get, if it could even get financing); the $250,000/$500,000 gain exclusion if sold, a transfer of your property tax assessed value at death if the property goes to children; and a step up in basis at death, under current law. Also, a living trust would not have to file a separate income tax return and pay state tax ($800/ year in California, for example). Check out your own states rules but, most important, see a professional.
Jim Kirby, CPA/PFS, CFP, CFS
PS What taxes do you think you would have to pay on the transfer of the real estate to family members? I am unaware of any taxes except estate tax (if your estate is over $2,000,000, or much lower if you are not a citizen) which would be payable on the transfer of stock also. So I am not sure what problem you think you are solving with the corporation.