Home interest deductions.

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We bought a house for my son and his wife because their credit wasn't sufficient. They paid the down payment and the mortgage. After buying the house we had their names added to the deed. How do we deal with the interest and property taxes? All the forms are in our name, but they actually paid the money. Since their names are on the deed now, can they take the deductions on their taxes? Or should we take the deductions and then just give them any refund we get because of them?

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kll

Level 10

They can take the deduction. They have what is called "equitable" interest in the property.

"Treas. Reg. § 1.163-1(b) permits a deduction for interest paid on a mortgage when a taxpayer is the legal or equitable owner of the property, even though the taxpayer is not directly liable for the mortgage."

A taxpayer becomes the beneficial or equitable owner of mortgaged property (allowing him to deduct mortgage interest on that property) when he assumes the benefits and burdens of ownership. Whether, and when, this has occurred is determined under state law, on a case-by-case basis.

In determining whether the benefits and burdens of ownership have been transferred to a taxpayer, the Tax Court often considers whether the taxpayer (1) has a right to possess the property and enjoy its use, rents, or profits, (2) has a duty to maintain the property, (3) is responsible for insuring the property, (4) bears the property's risk of loss, (5) is obligated to pay the property's taxes, assessments, or charges, (6) has the right to improve the property without the owner's consent, and (7) has the right to obtain legal title at any time by paying the balance of the purchase price. "