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How to protect your financial interest when contributing to your parents’ mortgage

How to protect your financial interest when contributing to your parents’ mortgage

Q: I purchased a home for my parents and was named on the mortgage along with my parents’ names even though I was the one making the payments. My husband and I recently paid the home off but realized that we aren’t on the deed because they are receiving homestead exemption.

I’m not sure if we should be added to the deed or if we should create a trust and name beneficiaries. Do you have an opinion as to how we can best protect our financial interest?

A: We get variations of this question quite often. Often, the question comes after a parent has quitclaimed the property to a child or if there is a second home. So, we’re happy you asked about this before signing documents.

Here’s our first question: Can you verify whether you are actually listed on title or only on the mortgage?

It’s rare for a person to be listed on a mortgage and not be included on the title to the property. When a lender provides financing, the lender must ensure that all individuals listed on the mortgage are also on the deed. Absent the signature of all the owners, the lender may be unable to foreclose on the property if the owner fails to pay what is due the lender.

If you’re listed on the mortgage note, we suspect that you’re also on title and are an owner of the home. If that’s true, then you and your husband co-own the property with your parents.

You mentioned that your parents receive a homestead exemption. In most states, homeowners can only receive a homestead exemption if they live in that home as their primary residence. That does not mean that they must be the sole owner of the home, but that the taxing authority will only give that tax benefit to a property that is occupied by an owner as their primary residence.

So, if you and your husband become the sole owners of the home, but you don’t live there, the homestead exemption would no longer be available. However, as long as you and your husband co-own the home with your parents, and your parents occupy the property as their primary residents, they can continue to get the homestead exemption.

What are your options? That depends on what the goal is. If you want to make sure you receive ownership of your parents’ interest when they die, you can put the property into a trust that names you and your husband as the beneficiaries. Then, the property will pass to you upon their death, avoiding probate.

You could also add your names to the title today (assuming you’re not on title) and make sure you own the property as joint tenants with rights of survivorship. That way, when one of your parents dies, the other owners would automatically receive that person’s share of the home. But that may set you up for a taxable event, which we’ll discuss shortly.

You can also keep the arrangement as it is, and make sure your parents write valid wills specifying that you and your husband are to receive their interest in the property. If, by chance, you’re not on title, keeping the status quo won’t prevent your parents from selling the property before they die and doing something else with the cash. It also won’t prevent them from taking out a home equity loan or reverse mortgage.

While these solutions seem simple, there may be a secondary issue relating to federal and state income taxes. If you and your husband aren’t already on title, adding your names to title would set your financial interest in the property as of the day you’re added.

If neither you or your husband are on the title to the home, you can add one or both of your names to the title and become co-owners with your parents. If you take this route, you’ll have to talk to an accountant or estate planner to see whether taking title to the home at this time will be considered a gift from your parents to you or whether you paid for the home over time as you paid down the mortgage.

It can be complicated to go into the intricacies here. Suffice to say that when you sell the home down the line, you could have a real tax problem if you don’t do your homework now.

On the other hand, if you don’t own the property when your parents die, you will inherit the home at its market value as of the day of their death. And, if you then move into the property as your primary residence, and live there for two years, you would be eligible to sell and take up to $500,000 in profits tax free (assuming current tax law doesn’t change).

For more information on the home sale exclusion, you can read our other columns on this topic, including this one on real estate and capital gains tax.

There may be other options for transferring ownership of the property. To find out which is the best way to go, you and your husband should sit down with an estate attorney. Go over the current ownership structure of the property as well as your plans for it now and in the future. You should also discuss how to protect your financial interest in the event you are not on title.

(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through their website,

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