Terminating a lease to own?

Question

I had written up a lease to own contract with my daughter and her husband; this contract was never recorded but in the last year they claimed all interest deduction on their taxes. They have run into financial trouble and have been unable to pay since March. They have also moved out and now are living with me giving me back the rental. In order to start claiming the interest on my taxes again and using the house as a rental again do I need to write up some kind of termination to have in my file and if so how do I go about doing it?

Answer 1

Usually, a rent to own contract does not make the buyers eligible to claim a deduction of the mortgage interest, even if they are making the payments.  Only the person responsible for mortgage is allowed to take the mortgage interest deduction.  The payments your daughter and her husband were making were considered rent.  A portion of their monthly rent is suppose to accumulate, and eventually go towards their down payment, when they later complete the purchase, and the deed transfers to their name.

You say, "...in the last year, they claimed all interest deduction on their taxes".  If you mean that they gave you back the house, after the last year of the contract, after the deed was transferred, and after the mortgage was in their name, then consult an attorney for advice.

Some rent to own contracts give the buyers a certain amount of time to renew their agreement in the event they stop making payments and move out.  If this is true in your case, then it's a good idea to get a signed document from your daughter and husband saying they have moved out and do not plan to renew the contract.

On your income tax return, you are allowed to deduct mortgage interest on rental property as of the date the property is available for rent.  You enter the amount of interest on Schedule E, as an expense.  

If the property was not available to rent for all 12 months of the year, then you need to prorate the amount of interest paid.  The property is considered available to rent once it is in "move in" condition, and you list it with an agent, or the ad goes in the paper, or you put up a sign, or you start telling people you wish to rent it.    You can only enter the mortgage interest as a expense on Schedule E, if the property is considered a rental.

You are allowed to deduct personal mortgage interest from loans you have secured by either your primary or secondary residences on Schedule A.

If the property is your second home, and the mortgage is in your name, and the property has not be a rental all year, then you are allowed to allocate the interest between Schedule A and Schedule E.  On Schedule A, deduct the amount of interest that corresponds to the time the property was not a rental.  The rest can go on Schedule E, once the property is available for rent..  

Hope this helps.  Good luck.