Can I pay mortgage interest... to Myself?

[The Controvert]

I own my home outright, but I'd like to take the mortgage interest tax deduction.

How easy is it to put in place a legal structure that would allow me to pay myself (or family members) mortgage interest and legally deduct it on my return?

Can I simply create my own mortgage or bank company? Is it possible to do this as a corporation or a limited partnership?

I guess if it's a matter of filing some forms with the state, then I'd definitely want to look into it. But if it involves getting a license and paying lots of fees, then it's probably not worthwhile.

[Dangerosa]

I own my home outright, but I'd like to take the mortgage interest tax deduction.

How easy is it to put in place a legal structure that would allow me to pay myself (or family members) mortgage interest and legally deduct it on my return?

Can I simply create my own mortgage or bank company? Is it possible to do this as a corporation or a limited partnership?

I guess if it's a matter of filing some forms with the state, then I'd definitely want to look into it. But if it involves getting a license and paying lots of fees, then it's probably not worthwhile.

Well, the problem is that the interest you'd pay to yourself would be taxable as interest to the corporation you'd set up. It isn't like the corporation won't pay taxes...

So you'd end up filing taxes twice and it wouldn't save you any money. Plus, I'm guessing the IRS wouldn't look kindly on it as a tax dodge and you might go to jail.

[The Controvert]

Interesting... however, it could shift income to other family members in lower brackets. And the corporation could offset some of the profits with its own deductions.

[The Controvert]

Hmm, I also wonder if people set up corporations where the tax year starts at a different time (say, June) and they shift the tax back and forth. Not really sure how that works, though, but it'd be nice if there was a way to keep putting it off.

[Dangerosa]

Interesting... however, it could shift income to other family members in lower brackets. And the corporation could offset some of the profits with its own deductions.

But you only get to take deductions on money spent. So lets say you have $200 in professional fees for your corporation, you get to write that off, at whatever the corporate tax rate is, But you are out the $200, get to write off 18% (or whatever). Creating expenses so you get deductions is no way to make money.

Plus, it isn't going to be legal in the end.

[The Controvert]

Actually, there are many perfectly legal ways to take corporate deductions. Travel costs for stockholder meetings, for instance.

[Xema]

Actually, there are many perfectly legal ways to take corporate deductions.
OTOH, the IRS notoriously frowns on "sham" transactions.

[RickJay]

Actually, there are many perfectly legal ways to take corporate deductions. Travel costs for stockholder meetings, for instance.
Yes, but then you have to pay for the travel. Everyone still saves money if you hold the stockholder's meeting close by.

As Dangerose points out, creating expenses to find deductions is simply nuts.

In any event, if you pay yourself mortgage interest you have to be able to show the IRS you actually borrowed the money, or had some sort of capital transfer, between yourself and the person/holding corporation you pay the interest to. Shifting the income from one party to another and then claiming the interest payment is going to attract the attention of the IRS, who'll raise the (perfectly legitimate) question as to what it is you're paying back. If you can't show that you actually borrowed money, the interest payments are invalid and you're in trouble.

[gonzomax]

Cartoon in Playboy many years ago. A man getting audited. revenue agent says problem is you are taking deductions like you are a somebody whereas you are a nobody.

[Balthisar]

Couldn't you just get a cheap mortgage, and dump the proceeds into something that generates a better-than-your-rate return? Then you have your equity working for you, and you also get that mortgage deductions.

[mhendo]

As Dangerose points out, creating expenses to find deductions is simply nuts. It constantly amazes me how often people shrug off expenses, or even seek to increase them, by appealing to the fact that they will get more tax deductions.

Do people not understand how tax and tax deductions work?

[commasense]

Couldn't you just get a cheap mortgage, and dump the proceeds into something that generates a better-than-your-rate return? Then you have your equity working for you, and you also get that mortgage deductions.IANA financial advisor, but I think that A) it will be hard to find an investment that reliably pays more than current mortgage rates, meaning that you might lose money, and 2) you'll have to pay taxes on any income earned from the investment, meaning that even if you earn more than the mortgage rate, you might lose money. Or so it seems to me. I mean, if your suggestion really worked, why wouldn't we all be doing it and be rich?

[The Controvert]

I think commasense hit the nail on the head. Lotsa good reasons I want to earn the mortgage returns. So, going back to getting the deductions part... is that easy or hard? Can I just say I am a bank, or do I need to set up a company or corporate entity? And do I need licenses and such? FDIC? What's the minimum qualifications for a banking entity in order to legally claim mortgage interest deductions?

[CookingWithGas]

What the OP is suggesting is the financial equivalent of the perpetual motion machine. Regardless of whatever legal hocus-pocus you might do, this is an effort to establish a mechanism for the sole purpose of avoiding taxes, which is not allowed (might be downright illegal but IANAL).



Actually, there are many perfectly legal ways to take corporate deductions. Travel costs for stockholder meetings, for instance.Yes, but then you have to pay for the travel. Everyone still saves money if you hold the stockholder's meeting close by.I don't want to put words in his mouth but I think the rationale here might be to take the family to Disneyland and then deduct the cost as a "stockholders' meeting."

Once I saw a newspaper article about an Amway distributer who got into some deep shit with the IRS for deducting virtually all of his personal expenses as "business expenses." The list of what he deducted was downright comical. Things like dog food as "security system maintenance" and a family visit to his mother-in-law's in Florida as a business expense, because at some point they discussed his Amway business.

[anson2995]

There could be advantages to setting up a corporation and transferring ownerhsip of your house to the corporation. However, I don't think the tax writeoff on mortgage interest is one of them, and if you're the sole owner of the corporation, it's gonna take the IRS about 12 seconds to figure out your motivation.

[The Controvert]

Well, I am not suggesting transferring ownership of the house to the corporation. In Texas, I am better off holding the title. I am suggesting creating a mortgage loan that is owned by a corporation and that I would make monthly payments for.

This is clearly okay when using a normal bank. The question is whether it is okay to deduct the interest if the corporation is essentially me and my family members.

As far as deducting business expenses for travel, it is perfectly legal to couch what is essentially a vacation as a stockholder meeting as long as you follow the rules. In the examples of people getting into deep trouble, those people are also breaking rules.

[FatBaldGuy]

Well, I am not suggesting transferring ownership of the house to the corporation. In Texas, I am better off holding the title. I am suggesting creating a mortgage loan that is owned by a corporation and that I would make monthly payments for.

This is clearly okay when using a normal bank. The question is whether it is okay to deduct the interest if the corporation is essentially me and my family members.I think just about everyone in this thread has told you that it is
Not OK
Probably illegal
Not economically viable
but you're not listening.

[The Controvert]

Well, maybe I'm wrong. But most of the posters are expressing opinions, not citing facts. Clearly this is okay if I'm dealing with a bank. I can own stock in this bank... still okay. At what point do you assert it becomes not okay? Cite?

[kanicbird]

IIRC there is a way of doing this, something about buying (and refinancing?) a home by borrowing money from your retirement account. Paying back your retirement account with interest. I really don't know the details though.

[Mr. Slant]

kanicbird,

I've got that option with my 401K.
I ran the numbers, and the tax implications of doing it would require me to be downright stupid to choose the option.
My 401K yields are higher than my mortgage rate.

[kanicbird]

Mr. Slant I'm just thinking out loud here, since you are borrowing the money against yourself, can't you set your own interest rate at a rate higher then your 401K rate?

I know such a tax loophole exists, mainly by people making mega-bucks, but again don't remember the details.

[anson2995]

Well, maybe I'm wrong. But most of the posters are expressing opinions, not citing facts. Clearly this is okay if I'm dealing with a bank. I can own stock in this bank... still okay. At what point do you assert it becomes not okay? Cite?

You're missing the fact that there are two ends to the transaction. You can deduct the mortgage interest on your individual tax return. However, the corporation must declare that interest as income on its tax return, and the effect will balance out, at best. As others have pointed out, I think you will probably end up losing money.

Plus, it is the corporation that will owe the taxes, not your relatives in lower tax brackets. Your theory, I suppose, is that their income is sufficiently low that the interest income from the corporation would still be below the threshold at which they owed taxes. It doesn't work that way.


But you'd like a cite for specific legals issues... ok. Tell me what state you live in and I'll point you to the applicable state laws. I believe the legal issues would be:

1) mortgage fraud -- You'll need to demonstrate that the corporation actually distributed funds. You can't do this unless you sell your house to a third party. Otherwise, your scheme claims the value of the house twice, which I believe would be illegal unless a transaction actually took place.

2) Tax fraud -- which, as RickJay points out, follows from claiming the deduction for a loan which didn't actually take place. People try this all the time by booking transactions between separate entitites which are actually the same (ie, two businesses or a business and an individual).

3) Most (all) states require mortgage brokers to be licensed, and if your corporation doesn't follow their rules and procedures you're subject to both fines and criminal prosecution.

[The Controvert]

State is given in my Location field and also mentioned in earlier posts... Texas.

I'm not sure where you get 1) from... I never claimed the value of my house twice. I create a mortgage loan with Controvert, Inc. Meanwhile, Controvert, Inc. holds the loan, collects payments (from me) and reports income (less the deductions from expenses). Furthermore, Controvert, Inc will be taxed at the corporate rate. Or, if it is an S Corp, income is legally shifted to family members in lower income brackets.

As for 2), a loan did take place.

3) could be a problem for me, unless it was straightforward to become a licensed mortgage broker. This is actually the "jumping through hoops" part that I'm wondering about.

[mhendo]

Well, maybe I'm wrong. But most of the posters are expressing opinions, not citing facts. Clearly this is okay if I'm dealing with a bank. I can own stock in this bank... still okay. At what point do you assert it becomes not okay? Cite?Here's a radical idea: go and ask a tax lawyer licensed in your jurisdiction.

It's been said dozens of times, and i'll say it again, that legal information from strangers on a message board is worth pretty much what you pay for it. I'm not saying that legal questions are wrong or should be forbidden, only that one of the reasons that lawyers go to law school and study for the bar is so that they can deal with issues that are more complicated than a simple "yes" or "no" answer.

While GQ is designed for questions with factual answers, and factual answers are sometimes possible even when the issue being discussed is a legal question, there are many questions where your own particular circumstances are crucial to the answer, and where even people with legal expertise may not be able to provide a definitive answer without knowing a whole bunch of specifics.

Some folks have given you answers based on their generalized understanding of tax law, as well as their understandings of the economics of tax abatement. While these may not be definitive, you seem like you're going to keep insisting that they are irrelevant until you get the answer you want. If you're not getting what you want here, then maybe you should think about paying a professional to handle this issue for you.

[Mr. Slant]

Mr. Slant I'm just thinking out loud here, since you are borrowing the money against yourself, can't you set your own interest rate at a rate higher then your 401K rate?

I know such a tax loophole exists, mainly by people making mega-bucks, but again don't remember the details.

Good point.
Remember, the money I put back in by paying on the note is POST-TAX money.
The money I put in the 401K was tax-free.
Right now I'm paying on a 5.75% fixed note, and the money in my 401K is earning around 8-10%.
If I borrowed against myself, I'd be using money that's making 8% to make 5.75%.

[Voyager]

State is given in my Location field and also mentioned in earlier posts... Texas.

I'm not sure where you get 1) from... I never claimed the value of my house twice. I create a mortgage loan with Controvert, Inc. Meanwhile, Controvert, Inc. holds the loan, collects payments (from me) and reports income (less the deductions from expenses). Furthermore, Controvert, Inc will be taxed at the corporate rate. Or, if it is an S Corp, income is legally shifted to family members in lower income brackets.

As for 2), a loan did take place.

3) could be a problem for me, unless it was straightforward to become a licensed mortgage broker. This is actually the "jumping through hoops" part that I'm wondering about.

You know, you can buy into bond funds backed by mortgages. I haven't checked, but I suspect they are paying close to mortgage rates. You can live dangerously and buy into a subprime mortgage fund too.

I'm not sure which family members you're expecting to pass the money to, but minor children get taxed at the parents rate up to a certain age, just to avoid this kind of thing. In any case, the money is now owned by the family member. You may not want your kid to have a bunch of money when he turns 18.

BTW, there is no problem with loans among family members. Part of my mortgage is with my father in law, but it is real, with an actual document. I deduct the interest, just like my bank loan, and he reports the interest.

[The Controvert]

Thanks, Voyager! I found your post informative and helpful. Did you have to do anything special at closing, or was the mortgage done after the home was purchased?

[anson2995]

State is given in my Location field and also mentioned in earlier posts... Texas.

I'm not sure where you get 1) from... I never claimed the value of my house twice. I create a mortgage loan with Controvert, Inc. Meanwhile, Controvert, Inc. holds the loan, collects payments (from me) and reports income (less the deductions from expenses). Furthermore, Controvert, Inc will be taxed at the corporate rate. Or, if it is an S Corp, income is legally shifted to family members in lower income brackets.

As for 2), a loan did take place.

No it doesn't. The corporation starts with no assets. It has no money to lend you, and no money actually changes hands. You could use cash to fund the corporation if you have it, or you could use the equity in your house. But if you do the latter, you are counting the house twice. Once as an asset of the corportation, and again as collateral for the mortgage.


I am not your attorney and this post does not constitute legal advice. I hesitate to be more specific in offering a reply that is sufficiently detailed for you.
I'm going to join with the others in saying that if you don't like the answers you're getting here, consult a local tax professional. For your edification however, I'd suggest a layman's reading of chapter 32 of the Texas penal code (http://law.justia.com/texas/codes/pe/007.00.000032.00.html) and chapters 24, 26, & 27 of the Texas Business & Commerce Code (http://tlo2.tlc.state.tx.us/statutes/bc.toc.htm).


3) could be a problem for me, unless it was straightforward to become a licensed mortgage broker. This is actually the "jumping through hoops" part that I'm wondering about.

Among the "hoops" in Texas are demonstrating three years of experience in the field, posting a personal bond for $50,000, and paying a $500 annual fee. (link to FAQs from the Texas Department of Savings and Mortgage Lending) (http://www.sml.state.tx.us/FAQ0304.htm)

[The Controvert]

Among the "hoops" in Texas are demonstrating three years of experience in the field, posting a personal bond for $50,000, and paying a $500 annual fee. (link to FAQs from the Texas Department of Savings and Mortgage Lending) (http://www.sml.state.tx.us/FAQ0304.htm)Actually, it's not necessary to jump through these hoops. AnswerBag.com (www.answerbag.com/q_view/51704) had a pretty good explanation:Question: Can my parents make a mortgage loan to me to buy a house? Answer: Legally, they are allowed to make a mortgage loan to you. If this will be the only mortgage loan on the house, there should be no difficulty, although I would strongly suggest that they follow the proper channels. (Have a written mortgage document, specify terms and conditions, specify security interest in the property, specify interest rate, register the loan.)

[RickJay]

State is given in my Location field and also mentioned in earlier posts... Texas.

I'm not sure where you get 1) from... I never claimed the value of my house twice. I create a mortgage loan with Controvert, Inc. Meanwhile, Controvert, Inc. holds the loan, collects payments (from me) and reports income (less the deductions from expenses).
But where is Controvert Inc. getting the money from? Unless you have people interested in investing in this, it must come from you, right? Controvert Inc. cannot loan Controvert T. Individual any money unless Controvert Inc. actually has, you know, some money.

[Yag Rannavach]

You know, you can buy into bond funds backed by mortgages. I haven't checked, but I suspect they are paying close to mortgage rates. You can live dangerously and buy into a subprime mortgage fund too.

I'm not sure which family members you're expecting to pass the money to, but minor children get taxed at the parents rate up to a certain age, just to avoid this kind of thing. In any case, the money is now owned by the family member. You may not want your kid to have a bunch of money when he turns 18.

BTW, there is no problem with loans among family members. Part of my mortgage is with my father in law, but it is real, with an actual document. I deduct the interest, just like my bank loan, and he reports the interest.
That's only a problem if the kid knows that they have the money. Handle their taxes for them, get yourself as a co-owner of the account, and give their SSN and then never let the kid know that they even have an account.

[The Controvert]

But where is Controvert Inc. getting the money from? Unless you have people interested in investing in this, it must come from you, right? Controvert Inc. cannot loan Controvert T. Individual any money unless Controvert Inc. actually has, you know, some money.Couldn't Controvert, Inc. issue stock to raise capital? And I don't suppose Controvert T. Individual is prevented from purchasing shares?