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Tax Tip: Equitable and Beneficial Ownership

Editor's Note: This article is part of our 2013 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 on Schedule A if you are legally responsible to pay the tax or mortgage and actually make the payments.

Often 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 will be recorded in the name of the parents, who live elsewhere. 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.

Even though the “kids” don’t have legal title to the residence, 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 paid as the “equitable and beneficial owner.”

If the title were in the name of the “kids,” but the parents actually paid the real estate taxes directly to the municipality, the parents would not be able to 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 “kids.” It is as if the parents gave the money directly 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.

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