"Quit Claim Deed & itemized deductions

[taxgirl]

Taxpayer has quit claim deed from parents house and wants to take mortgage and property tax on sch a but the paperwork is still in parents name. Is a copy of the quit claim enough to justify even though paperwork hasn't been updated?

[Koss]

Mortgage Interest & Property Tax

First, you have to look at the dates in question. What is the date on the deed? And when were the property tax and mortgage payments made? And who actually made the payments?

But that isn't enough to answer the question.

The property tax is relatively easy. If you own the home and you made the payment, then you get to deduct it.

The mortgage is much more complicated. The general rule is that in order to deduct mortgage interest, you must have actually made the payments, and you must also be personally liable for the payments.

You can't just "update the paperwork." If the parents bought the house with a mortgage, and then transferred ownership of the house to their son, that does not make the son liable for the mortgage loan, and it does not release the parents from their liability. In fact, technically, it violates the terms of the mortgage loan. You can't give away a house when you still have a mortgage loan on it. The loan has to be paid off at the time the ownership changes, just as if the house had been sold.

If they talk to the bank, they will be told that the son has to apply for his own mortgage loan and basically refinance the house.

With that being said, the courts have found that in some cases, where a family member agrees to assume the mortgage loan payments, that family member acquires an equitable interest in the property. The deed gives him legal title. If he is actually making the mortgage payments, he may be able to deduct the interest, even if he is not legally liable for the loan.

I know this isn't the answer you're looking for, but you're in a gray area of the law.

BMK

[Koss]

Mortgage Interest

See page 4-11 of The Tax Book, under the heading "Legal Liability to Make Payments," for a reference to the court case I mentioned.

BMK

[taxgirl]

Regarding the original post - does the quit claim mean they "own the home" and therefore can take the property tax deduction even though the house is still in the parents name?

Also, based on what you directed me to, I'm understanding that since the mortage is still in mom and dads name and they are legally liable for the property, the kids don't get the deduction?? yes?

[TaxGuyBill]

It could vary by State, but in my State (Minnesota) a "quit claim" deed is meaningless until it is registered with the county. Once it is registered, that means the "paperwork" would not be in the parents' names.

If the MORTGAGE was still in the parents' names and the new owner legally owns it, the new owners can claim the mortgage interest if they pay it.


Again, when the legal ownership changes may depend by what State you live in.

[Koss]

Regarding the original post - does the quit claim mean they "own the home" and therefore can take the property tax deduction even though the house is still in the parents name?

How is the house "still in the parents name" if the parents signed a quit claim deed?

The act of signing a deed transfers ownership of the home. But as explained by TaxGuyBill, until the deed is recorded by the county recorder, it has no effect.

If the parents signed a quit claim deed back in 2014, but it has not yet been recorded, the someone has dropped the ball here. Did they do this without a lawyer, using LegalZoom or something?

Have you seen the deed? Is it even notarized? If so, does it have a stamp or seal from the county recorder's office?

This may be a textbook example of why people should not do their own legal documents, or do their own income taxes. They also should do not do their own surgery, or electrical wiring, or roofing...

BMK

[ATSMAN]

I just had a similar situation with one of my clients. His Dad died in July 2014 with a house and mortgage that he inherited. Told him to make sure his lawyer got the title transfer recorded in 2014 so that he can claim the mortgage interest of the assumable mortgage.

[taxgirl]

I have a copy of the deed and it has been notarized but nothing from the county. I'm done with this. I'm informing the client that since the county auditor's office still shows the parents as owners and the mortgage interest statement is in their name also, they can't have the deduction.

[ATSMAN]

What is the date they executed the quit claim deed and notarized?

Is it in 2014?

In my state there is at least a month delay for it to show up in public records.

[taxgirl]

It is dated May 16, 2014.

[Lion]

There are instances of "equitable ownership" where the residents act as owners, paying all the expenses whether in their names or not. The classic court case involved a taxpayer who had bad credit so parents bought the home and took out the mortgage that the taxpayer treated as his own.

It wasn't due to forgetting to record the deed. But, worth some research to see if you can save your client some taxes.

[taxgirl]

Based on page 4-11 from the taxbook, I looked at the equitable owner angle yesterday. Everything I found discussed "equitable ownership" as the rights of a trust beneficiary.

I do appreciate the input I have received regarding this.