Q. My dad’s name is on a deed. He filed a quit claim deed and disclaimer of two-thirds of the house where he and I reside, giving one-third each to me and my sister and keeping one-third interest for himself. My sister lives elsewhere. Both my dad and sister approve of me paying the full taxes, some $8,500 a year, and claiming the tax deduction. Can I?
— Partial owner
A. We’re glad you asked because this issue is more complicated than you may think.
In New Jersey, a taxpayer in 2018 can deduct up to $15,000 of New Jersey property tax from his or his New Jersey income tax return, said Adam Sandler, an attorney with Einhorn Harris in Denville.
However, New Jersey law does not allow a taxpayer to deduct more than his or her proportionate share – in relation to percentage of ownership – of property tax, Sandler said.
“Therefore, the taxpayer in the example would be limited to one-third of the property tax even if he or she paid the entire tax,” he said.
At the federal level, as a result of the Tax Cuts and Jobs Act, a taxpayer is limited to a $10,000 state and local tax deduction on his or her federal income tax return.
“The general rule is that a taxpayer can take the deduction for state and local taxes if he or she actually paid the tax and was liable for it,” Sandler said. “In other words, you cannot pay another person’s taxes and claim it as a deduction.”
Unfortunately, he said, the law is not entirely clear on whether a co-tenant of property can deduct more than his or her proportionate share of property tax.
In many states, including New Jersey, property tax is assessed on the property itself and not on the owners individually. Likewise, unpaid property tax becomes a lien on the property itself and not on the owners individually, Sandler said.
Because the property may be sold by the municipality to satisfy the lien, the U.S. tax court has held that if a taxpayer pays more than his or her proportionate share of local property tax, the taxpayer can deduct the tax so long as the payment was made to preserve the taxpayer’s rights and beneficial interest in the property, he said.
There is, however, a caveat to this rule wherein lies the ambiguity in the law.
“Many states, including New Jersey, give a co-tenant who pays property tax in excess of his or her proportionate share the right to sue the other co-tenants for contribution,” Sandler said. “The U.S. Tax Court has held that if the taxpayer receives such contribution, whether voluntarily or by lawsuit, then the amount of the contribution will reduce the allowable deduction.”
However, the U.S. tax court has also held that even if the taxpayer did not receive contribution, the mere right to contribution will disallow the deduction for property tax paid in excess of the taxpayer’s proportionate share, he said.
Because these tax court decisions are based on the facts presented in the specific cases, deductions may be allowed in certain instances and not in others, Sandler said. That’s why you should consult with a professional tax advisor to determine whether a deduction is appropriate based on your individual circumstances.
Email your questions to moc.p1548025892leHye1548025892noMJN1548025892@ksA1548025892.