A reader asks: About 15 years ago, I co-signed with my brother on a mortgage loan. The loan is paid off now. He would like me to withdraw my name so he can put his wife’s name on the house. I have no objection to that, but I worry about the tax consequences. I have no interest in his home nor did I put up any money for the mortgage or payments. Does the IRS consider the removal of my name from the house as a sale on my interest in the property and tax me on it?
The problem: Sorting out the taxes that can result from a co-signed home loan.
The solution: This is a good question, with generally, a simple answer. If you merely “co-signed,” there shouldn’t be any problem taking your name off the paperwork. You mentioned that the loan is paid off now. Well, then there is truly no problem as long as everything has been done as
you have described. Generally, when someone agrees to “co-sign,” it means that if the person who is buying the home defaults on payments, the co-signer will be asked to make things right as far as the indebtedness is concerned. The co-signer appears on the note or mortgage as a cosigner and shouldn’t appear anywhere else in the month-to month mortgage payment coupons.
What about the deed to the house? You could have changed that at any time during the life of the loan, and it wouldn’t make any difference to the mortgage company or the indebtedness. You would still be the co-signer and still be responsible for the debt in case of a default. Another place where your obligation as co-signer arises is your credit report. If the loan is paid off, it would be wise to notify the major credit-reporting agencies that your name is no longer on this note and the debt has been satisfied.
Contact numbers are: Experian (800) 831-5614; Trans Union Corp., (800) 916-8800; Equifax, (800) 270-3435. Be prepared to offer that the loan has been paid off. That should clear up that end of things. Now, about the IRS. As long as things are as you stated, there are no issues to deal with. But the situation can get complicated when you are actually on the mortgage notenot as a co-signer, but as some type of owner of the
property. That’s when you need to clear up matters.
For example, did you take any deduction for mortgage interest that you didn’t pay? Or, have you been paying this mortgage all along and your brother has been paying you, etc? Then you need to discuss how this has been handled with the accountant thatfiled the return for all parties
concerned.
Even so, under the present law (covering sales after May 7, 1997) there may not be a problem with taking your name off as long as it was also your residence during this time and the capital gains were under $250,000 for single or $500,000 for married filing jointly. You must have lived in
the home for two out of the past five years, as well. Then there is no reporting to do because there has been no taxable event.
However, if you did not live there, then there may be a taxable event, as this transaction is considered as investment-property sale. The Federal Form 4797 would be filed with your personal tax return. You would run into three different levels of tax (28 percent, 25 percent, 20 percent), which should be discussed with your tax adviser right away for clarity. How much tax you’d owe would depend on the specifics of your situation and shouldn’t be summarized in general terms in a brief column such as this.
Advice to remember: The information here is presented in its simplest form regarding property transactions. These transactions can be very complicated and can surprise you as to the amount of tax that could be due. Therefore, it’s imperative that you contact a financial adviser or your tax adviser. It can save a lot of grief in the long run.There may be ways to handle this type of transaction to avoid (not evade) the tax entirely at least for now, so try to discuss what you are thinking about far in advance of the transaction if you can- to allow time for some creative moves on your behalf. Interestingly enough, the realestate tax laws have built into them some opportunity for profits. Check it out.
Disclosure: The information and opinions expressed in the articles are for general information only and are not intended to provide specific advice or recommendation for any individual situation or security. The opinions of the author do not necessarily reflect those of Woodbury Financial Services, Inc. or its affiliates.
Loan Co-Signer Worries About Taxes,
