Generally real estate taxes on a personal residence are deductible only by the titled owner of the property. The same rule applies to mortgage interest.
However a taxpayer who does not have legal title to a residence may be able to deduct the real estate taxes and mortgage interest paid if he/she can be considered the "equitable and beneficial owner" of the property. An "equitable and beneficial owner" is a person who has the exclusive "burden and benefit" of the property – he/she occupies the property exclusively, makes the mortgage payments, and maintains the property.
John and Mary are newlyweds who are just starting out. They are unable to secure a mortgage to purchase a home. John’s parents are well off and decide to help the couple out by purchasing a home for them.
The parents live in their own separate personal residence. John and Mary make all the mortgage payments directly to the lender and they pay the real estate taxes directly, or via an escrow account, to the municipality. They also pay all the utility, insurance and maintenance bills for the residence. If a repair needs to be made to the home it is paid for directly by John and Mary.
The parents are the legal owners of the property, but John and Mary are the “equitable and beneficial” owners and can deduct the real estate taxes and mortgage interest paid on their Schedule A.
New Jersey tax pro Robert D. Flach has been preparing 1040s for individuals since 1972.
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