Can a trust beneficiary deduct property taxes?

[Tackslawyer]

1. Child creates revocable trust and contributes residence (and nothing else) into the revocable trust.

2. Child reserves right to amend/revoke all trust property (100% grantor trust).

3. Child gives father rights to reside in trust property, with caveat that if father uses trust property as his personal residence, that father must pay all taxes and expenses associated with upkeep up residence.

Can father deduct property taxes on his federal 1040 if paid to the state? Father is technically not the owner of the home, (the son as trustee is.)

[veritas]

I don't see how

since the taxes were not directly imposed on the father. The father might have a gift tax issue though.

[S T]

Interesting Post

I am so glad you posted, as I also just learned of one of these for one of my tax clients.

Son's trust purchased the house for the Mom and Dad, and Mom and Dad stated that they would have property tax to deduct for 2009 as that is what they pay. This all came out in planning for 2009 and estimated tax payments.

I don't see how Mom and Dad can deduct on their tax return as they do not own the property, the Son's Trust owns the property. So wouldn't Mom and Dad have to pay the trust for the property taxes and insurance and then the Trust can't even deduct them?

Sandy

[Bees Knees]

The code section that allows a property tax deduction on Schedule A is Section 164. Regulation Section 1.164-1(a) says in part: “In general, taxes are deductible only by the person upon whom they are imposed.”

This rule is the reason why on the sale or purchase of a home, you can only deduct taxes that have been allocated to you during the time you owned the property. If you are the buyer and pay any of the taxes for the time period the seller owned the property, those taxes are added to your cost basis in the property. If you are the seller and pay any of the taxes for the time period the buyer owns the property, those taxes are treated as a reduction in the sales price.

There is an exception for business expenses. If you lease property and the lease contract says you are to pay the property taxes, those taxes would be deductible as an ordinary and necessary business expense under Section 162.

I don’t know of any specific regulation dealing with property taxes paid by a beneficiary of a revocable trust. A revocable trust is generally ignored for federal tax purposes, meaning the grantor puts everything on his/her 1040 and no 1041 is filed. It would be the same as not having a revocable trust, and just letting someone live in your house. In exchange for you letting them live there, they pay all the expenses, including utilities, property taxes, and insurance. Those expenses would be treated as paying rent for use of the property. Paying rent for the use of property is not deductible, unless the rent is paid for business purposes.

[taxea]

Can a trust beneficiary deduct property taxes?

Ah but a rental is not considered a business. The parents should pay the expenses directly to the owner and the owner should pay the expenses to the mortgage company, etc. The father is beneficiary not trustee.
Your client should declare the rental and show the payments to him by the parents as rental income, he then has the benefit of deducting the expenses and the depreciation on the property.
The rental income from a relative should be no less than 10% under FMV of rent. taxea

[VT-EA]

Are he burdens and benefits of ownership transfered?

1.
3. Child gives father rights to reside in trust property, with caveat that if father uses trust property as his personal residence, that father must pay all taxes and expenses associated with upkeep up residence.

If my question is answered, yes Dad can deduct. See http://www.ustaxcourt.gov/InOpHistoric/USLU.TCM.WPD.pdf
and http://www.ustaxcourt.gov/InOpHistor...AN.TCM.WPD.pdf

[Bees Knees]

I disagree

If my question is answered, yes Dad can deduct. See http://www.ustaxcourt.gov/InOpHistoric/USLU.TCM.WPD.pdf
and http://www.ustaxcourt.gov/InOpHistor...AN.TCM.WPD.pdf

Those two cases you cite are loose contract for deed arrangements. A sort of unconventional way of financing property for someone who cannot obtain their own financing.

This case is about a revocable trust that allows someone to live in the house. A revocable trust by its very nature is not a financing arrangement to sell property, nor is it considered permanent since the grantor can take back the property at any time for any reason. Being allowed to use revocable trust property is more like a rental arrangement than transferring any kind of ownership. If it were an irrevocable trust that allowed father to live there, you may have a point as an irrevocable trust IS the transfer of property.

[Tackslawyer]

Those two cases you cite are loose contract for deed arrangements. A sort of unconventional way of financing property for someone who cannot obtain their own financing.

This case is about a revocable trust that allows someone to live in the house. A revocable trust by its very nature is not a financing arrangement to sell property, nor is it considered permanent since the grantor can take back the property at any time for any reason. Being allowed to use revocable trust property is more like a rental arrangement than transferring any kind of ownership. If it were an irrevocable trust that allowed father to live there, you may have a point as an irrevocable trust IS the transfer of property.

Interesting. Although the trust agreement DOES require the beneficiary to pay for all expenses and taxes in the event the beneficiary establishes residency, the trust itself may be revoked at any time.

On the other hand, in Florida, such an arrangement would qualify for homestead purposes. (The deed where the settlor transfers the residence to the trust would also contain a provision that requires the beneficiary to pay for all expenses). Normally, the federal government will look to state law when determining property rights. Does qualification of homestead status under state law constitute enough property rights under federal law to be treated as the owner of such homestead for federal income tax purposes?

I can see both sides of this argument, which is why I posted the initial question. I think the trust alone may not do the trick, but in conjunction with language in the deed, might very well be enough. Emphasis on "might".

[Bees Knees]

A lease contract can also require the renter to pay all such expenses. That does not make it deductible.

It should also be noted that many states allow homestead type credit when you allow a relative to live in the house and no rental arrangement is made. That doesn't prove anything.

You should also note that court case citations are for one taxpayer, and similar taxpayers in similar situations are not always covered by their rulings. One slight difference and the case cannot support your position. There is a BIG difference between a revocable trust and an oral contract for deed.

[Kram BergGold]

I think I found the answer

In the October 2008 TAX PRO Monthly, distributed by NATP, there is an article on page 3. It addresses the issue of beneficial ownership. If the inhabitant of the house is the beneficail owner regardless of how the property is titled or whose name is on the mortgage and the inhabitant of the house makes the payments of interst and taxes then they get the deductions. In your case, the parents are not beneficial owners. Clearly the child (throught the trust) owns the house and is just letting his parents live there. So the parents can't take a deduction, nor can the trust or son. To me you have a situation where the payments made by the parents are both rent deductions to be claimed by the child.

[Gretel]

Beneficial owner

I thought the deduction the beneficial owner can take is for mortgage interest only. Taxes are not imposed on the beneficial owner.

[veritas]

Or

In the October 2008 TAX PRO Monthly, distributed by NATP, there is an article on page 3. It addresses the issue of beneficial ownership. If the inhabitant of the house is the beneficail owner regardless of how the property is titled or whose name is on the mortgage and the inhabitant of the house makes the payments of interst and taxes then they get the deductions. In your case, the parents are not beneficial owners. Clearly the child (throught the trust) owns the house and is just letting his parents live there. So the parents can't take a deduction, nor can the trust or son. To me you have a situation where the payments made by the parents are both rent deductions to be claimed by the child.

a gift from parents to child and the child claims the deduction.

[Tackslawyer]

It looks like a beneficiary of a revocable trust may, in some instances, take any mortgage and/or taxes paid as a deduction on his or her own federal income tax return.

"The Tax Court allowed the deduction even though the taxpayers did not have legal title to the house and were not personally liable on the mortgage. The taxpayers deducted mortgage interest payments on a mortgage that the husband's brother had signed for them. The court found that, in effect, the mortgage payments made by the taxpayers to the lending institution were payments of principal and interest to the husband's brother. As such, the payments constituted payments on an indebtedness of the taxpayers. The court found that the taxpayers' agreement with the husband's brother to pay the mortgage, coupled with their continued occupancy of the property and their performance of all obligations under the mortgage, were sufficient to render the taxpayers' obligation to pay off the mortgage an enforceable debt to the husband's brother for the amount of the mortgage at the interest rate specified in the mortgage. The Tax Court found that the taxpayers held equitable and beneficial ownership of the property because they had made every required mortgage payment, had paid all property maintenance expenses, and had been the sole occupants of the property since the date of purchase. In addition, the court noted that real property taxes and insurance on the property were paid from an escrow account funded with a portion of the taxpayers' mortgage payments.156 The Uslu case was followed in another case in which a relative of the taxpayers obtained a mortgage for them because their prior bankruptcy prevented them from obtaining a loan in their own names. The taxpayers made the down payment on the property, paid all mortgage payments and property taxes, and also paid for improvements on the property. The court, citing Uslu, stated that the taxpayers had the burdens and benefits of ownership and thus allowed them to deduct mortgage interest and property taxes paid on the property."