Deducting Real Estate Taxes: How Do You Know If You Qualify?

Deducting Real Estate Taxes: How Do You Know If You Qualify?

Editor's Note: This article is part of our 2014 Tax Tips series. Robert Flach is an expert with more than 40 years of experience as a tax professional and also blogs as The Wandering Tax Pro.

NEW YORK (MainStreet) — Generally you can only deduct the real estate taxes and home mortgage interest for a property on Schedule A if you are legally responsible to pay the tax or mortgage – your name is on the title - and you actually make the payments. But there are situations where taxpayers who do not hold title to the property can claim the tax and interest deductions.

Sometimes a young married couple just starting out doesn't have enough income or credit to get a mortgage, so their parents will purchase the house. The deed and mortgage is recorded in the name of the parents, who live elsewhere. The young couple live in the property as their personal residence, maintain it, and pay all the bills, including the property taxes and the monthly mortgage payment.

Even though the young couple does not have legal title to the residence, and are not legally responsible for making the tax and mortgage payments, 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 - and can deduct the real estate taxes and mortgage interest paid as the "equitable and beneficial owner."

If the title was in the name of the young couple, but the parents actually paid the real estate taxes directly to the municipality, the parents could not deduct the taxes they paid, as they were not legally responsible for the payment. The tax payments made by the parents are considered to be a gift to the couple. It is as if the parents gave the money directly to the couple and they used it to make the real estate tax payments. In such a case the couple would claim the tax deduction for the taxes paid.