Q. A widower in his 80s owns a home with a second mortgage. One daughter lives with him and the other daughter lives out-of-state. The widower then dies but his name remains on the home and the mortgage, and his estate never went into probate. The daughter who lived with him continued to pay the mortgage and the tax bills. Can this daughter take tax deductions for the mortgage interest and real estate taxes even though the house isn’t in her name?
A. The fact that the estate was never settled shouldn’t matter in this case.
And there’s some good news for you.
The daughter paying the real estate taxes and mortgage should be able to take the deduction for property taxes because even though the property is still titled in the deceased father’s name, she obtained an ownership interest upon his death, said Steve Holt, an attorney and chair of the taxation, trusts and estates department at Mandelbaum Salsburg in Roseland.
The exception would be is the father had a will that specified that the property was not supposed to go to her and/or her sister.
Holt said real property devolves immediately upon death, regardless of whether any formal transfer documents are recorded.
With respect to the mortgage interest, she should be able to take that as well, Holt said.
“Pursuant to the Internal Revenue Service regulations (Treas. Reg. §1.163-1(b)), even if a taxpayer is not directly liable on the mortgage (i.e., his name is not on the mortgage documents), he can deduct any interest he pays on the debt as long as he is the legal owner of the house, which the daughter is,” Holt said.
The daughter may qualify for either a deduction or a refundable credit on her New Jersey income tax return for the real estate taxes paid, Holt said.
The property tax deduction would reduce her taxable income, and the tax benefit depends on her taxable income, the amount of taxes paid and her filing status.
“The property tax credit reduces her tax due and is subtracted directly from her tax liability,” Holt said. “Completing Worksheet G in the New Jersey Resident Income Tax Return instruction booklet will determine whether she would receive a greater tax benefit by taking the deduction or credit.”
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