Editor’s Note: This article is part of our 2012 Tax Tips series. Robert Flach is an expert with almost 40 years of experience as a tax professional and also blogs as The Wandering Tax Pro.
NEW YORK (MainStreet) – Generally, you can only deduct real estate taxes and home mortgage interest if you are legally responsible to pay the tax or mortgage, and you actually make the payments.
Taxpayers who don’t have legal title to a residence may be able to claim a deduction for the real estate taxes and mortgage interest on the property if they are considered “equitable and beneficial owners.”
A young married couple starting out often does not have enough income or credit to get a mortgage, so their parents will purchase a house for the kids. The deed and mortgage will be recorded in the name of the parents, who live elsewhere, but the kids will live in the property as their personal residence, maintain it, and pay all the bills, including the property taxes and the monthly mortgage payment.
The kids are considered the “equitable and beneficial owner” of the property because they have the exclusive “burden and benefit” of the property – they occupy the property exclusively, make the tax and mortgage payments, and maintain the property. They can deduct the real estate taxes and mortgage interest.
If the title to the property was in the name of the kids, but the parents actually paid the real estate taxes directly to the municipality, the parents cannot deduct the taxes they paid on their Schedule A, as they are not legally responsible for the payment.
The tax payments made by the parents are treated as gifts to the kids. It is as if the parents gave the money to the kids and they used it to make the real estate tax payments. In such a case, the kids would claim the tax deduction for the taxes paid.