Your mother cannot have a mortgage on your property unless she shares in the
ownership-of your home. If she is a co-owner, she could also be a co-borrower,
sharing responsibility for the mortgage according to a formula that your agree
on beforehand. On your mother's rental property, she could take out her own
first mortgage.
Let me now turn to the question you didn't ask, but should have because it
is more important than the question you did ask. Does it make sense to take
out a mortgage for the sole purpose of sheltering other income from taxes? The
answer depends on how the mortgage proceeds are invested. If the rate paid on
the mortgage is higher than the rate earned on the investments, taking out a
mortgage is a loser, regardless of what tax bracket you are in.
Suppose, for example, your mother borrows $100,000 at 6% to invest the proceeds
at 5%, and she is in the 40% tax bracket. Then her interest cost in year 1 is
about $6,000 less the tax saving of $2,400, or $3,600. Her interest income is
$5,000 less the tax liability of $2,000, or $3,000. Net she is $600 in the hole.
A more refined analysis would take account of mortgage costs other than the
rate, including points (which are deductible) and other settlement costs that
are not. It would also take account of the risk of loss on other investments.
The conclusion would not change, however, because both of these factors would
add to the net loss.
The moral is very clear. It is never sensible take out a home mortgage for
tax reasons alone unless you have investment opportunities that provide risk-adjusted
yields that are higher than the cost of the mortgage.
August 9, 1999
