The Tax Consequences if Parents Pay a Child's Mortgage

It's not always easy for kids to make ends meet after leaving the nest, so it's not uncommon for parents to continue to try to help out, for example by paying their child's mortgage. However, even if you're the ones making the payments, you're usually not going to get a deduction -- and you might even get hit with a gift tax bill.

Mortgage Liability Requirement

To deduct mortgage interest on your taxes, you have to be legally liable for the debt and it needs to be secured by your ownership in the home. If the mortgage is in your child's name and you have no ownership[ interest in the house, you're not legally on the hook for the debt, no matter how much personal responsibility you feel for making sure your kid has a roof over his head, so you can't deduct the mortgage interest paid on your taxes. Instead, if you're giving the money to your child to pay the mortgage, your child gets the deduction.

Gift Taxes

When you give money to your child, it counts as a gift. Each year, you're allowed to give each person a certain amount, which is excluded from gift taxes. As of 2013, it's $14,000 per year. Anything over that amount counts as a taxable gift. For example, if pay $20,000 for your daughter's mortgage in 2013, you're $6,000 over the limit, meaning that the last $6,000 of your payments counts as a taxable gift.

Multiple Gifts

If you're married, you and your spouse can each give up to the annual exclusion without triggering any gift taxes. As long as the amount each of you pays falls below the limit, you won't owe any gift taxes or even have to file a gift tax return. However, if one of you gave more than the limit, there's still hope -- it just involves a little more paperwork. The IRS allows you to do "gift splitting," which means that any gift you make is split with your spouse, regardless of who gave the money. Of course, your spouse has to sign off on it and you need to file a gift tax return to take advantage of it. Either way, you and your spouse could pay up to $28,000 annually toward each of your children's mortgages without owing gift taxes.

Gift Tax Bill

Even if you're over the limit, chances are you won't actually owe the IRS anything for the year. That's because a certain amount of each person's assets is exempt from estate and gift taxes. As of 2013, that amount is $5,250,000. Any portion of that exemption that you use up during your life reduces the amount of money you can leave to your heirs without paying estate taxes. For example, say you've given $2 million in mortgage payments and other gifts during your life. When you die, only the first $3.25 million of your estate escapes estate taxes. Because most people won't leave an estate that large, most people will never owe a penny in gift taxes, either.

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About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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