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Lets say I take out a mortgage to buy a house, and I'm the only borrower on the loan. My girlfriend's dad gifts me $125k to pay the down payment. She and her parents go on the title, along with me.

Then I pay $1600 in mortgage payments (PITI; $1229 to PI) per month. My girlfriend pays a $550 share to me, and we sublease a room to a friend for $450 as well.

Obviously, I have to count the friend's payments of $450 as rent. This goes into my AGI (adjusted gross income), if I understand correctly from IRS Publication 527. However since my girlfriend is on the property title, and her parents paid all of the down payment, why should her payments be considered rent?

True, the loan is in my name only, but that was only done because she is recently self-employed, and her credit score of 690 would bring up the rate. But she is a co-owner of the house, being on title, and therefore can't rent there, right?

Or is it considered that because I'm the only one responsible for the mortgage, therefore the mortgage is my expense, and anyone helping me with that expense is therefore paying rent?

I'm just worried because I'm on an income-based repayment plan for my student loans, and if I must count this payment as rent, it's going to make it look like I'm earning a lot more money than I actually am, and my student loan payments could go WAY UP because I would no longer qualify for income-based repayment. In that scenario, actually my loans would increase by $350 a month! In which case I might as well let my friend live here for free, just about!

What should I do? Just back out of the house and not buy it after all? (Still could back out at this point.)

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    Did the bank say you can get a loan on your own with someone else on the title? What kind of title is that, do you own a defined share or is it joint? You may not be able to get a loan at all – littleadv Jun 19 '15 at 3:57
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    There's a whole bunch of issues here, and I think you should talk to a lawyer about this situation. Your girlfriend may claim that her (family's) assistance entitles her to larger share of the house, for example. What happens if you split? You'll end up on the hook for mortgage on a house you no longer own. Be careful here. – littleadv Jun 19 '15 at 5:49
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    Also look at the gift. $125K at once in the US would cause them issues. They could split the gift between you and their daughter. In fact they could make it 4 gifts. But since they are also on the title that means that they are just purchasing their portion of the house with cash. Lots of issues beside how to declare rent. – mhoran_psprep Jun 19 '15 at 10:25
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    You need a lawyer. – Andrew Leach Jun 19 '15 at 11:33
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    There's a lot more going on here than the mortgage interest. You need a pro, and if it's not clear, when members say lawyer, the lawyer needs to one specializing in tax matters. Me, I'd suggest a CPA or Accountant, again, with specialty in this area. Is this all a proposal or is the propertyy purchased already? – JoeTaxpayer Jun 19 '15 at 16:01
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It would NOT be considered rent. She is an owner and so her money would count as a payment on the mortgage.

The rent/income question would not come up to the IRS because if and when you were ever audited she can show that she made payments toward the mortgage to you and you paid the mortgage with that money. The only time the IRS would come into play is when it is time to take an interest deduction on taxable income. She COULD take a portion of the interest reduction because she is co-owner, however it is more likely that you would take the interest reduction because you are on the mortgage.

However if the IRS ever questioned it she would just show thru bank statements how much she paid you over the year and that percentage of the payment amount would be the same percentage of interest deduction she would be able to claim. I must say though that this is a "grey" IRS area.

Hope this helps!

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    In the same regard that one can't take the real estate tax deduction if they do not own a property (if a parent paid the kid's property tax), how can she claim it's a mortgage payment if she is not on the mortgage? It's not her debt. It's looking like rent unless they get married. And no interest deduction for her. She has no debt. – JoeTaxpayer Aug 27 '15 at 13:53
  • @joetaxpayer: Or gift, with the gift exclusion... though I'm not sure whether that would be a net win. – keshlam Aug 27 '15 at 14:30
  • @keshlam - So one can have friends live in rooms, but accept non-taxed 'gifts' and never claim the not-rent as income? Hmmm. – JoeTaxpayer Aug 27 '15 at 14:41
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    @keshlam - You're only right in that one can wish for common sense to prevail. But instead of deciding what makes sense, I'm looking at it through the glasses of an IRS audit. The girlfriend has no different standing than the friend renting. To make matters worse, I can make the case that the gift wasn't a gift at all. It was in return for equity, as they are on the title. The whole situation could either have been handled better, or better explained. – JoeTaxpayer Aug 27 '15 at 16:28
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    I guess I'm comparing it with sharing a rental. If you both contribute toward the rent the question of whether it passes through the other roommate's bank account and a single check is written to the landlord really shouldn't matter; that's entirely a bookkeeping detail. Having both on the title does mean value is passing from one to the other, but how much should depend on how their paperwork and/or the law says the value of the house divides between them vs. how much each is contributing; it isn't straight dollar-for-dollar income. So, yeah, accountant/lawyer, make that all very explicit. – keshlam Aug 27 '15 at 17:05

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