Posted by Stacy (AZ) on June 03, 2002 at 15:34:40:
Absolutely incorrect information. You’re paying the payments, you claim the interest deduction. Make sure your seller knows this so they don’t also try to claim the deduction.
Taking “Subject to mtg” - Posted by Dave
Posted by Dave on June 03, 2002 at 15:26:51:
I purchased a principal residence by taking subject to the seller’s recorded mortgage and giving him cash for his equity. Deed is in my name. I have been recently told by the “highest authority” that I cannot deduct the interest paid on the mortgage on my IRS 1040 Schedule A tax form since I am not personnally liable on the note and mortgage. Has anyone run into this or provide IRC reference or ruling reference. Needlessto say all replys appreciated.
Tax implications Re: “Subject to mtg” - Posted by Peter_MD
Posted by Peter_MD on June 10, 2002 at 10:11:48:
Dave:
Consult a professional because you are definitely confused about tax laws.
For example: You state, “I have been recently told by the “highest authority” that I cannot deduct the interest paid on the mortgage on my IRS 1040 Schedule A tax form since I am not personnally liable on the note and mortgage.” That is absolutely correct.
The “highest authority” told you that because the tax laws, as written, allow a Form 1040, Schedule A deduction for interest expense and real estate taxes on your PRINCIPAL residence with an exception for a second residence.
However, this Subject to deal does not involve a residence for you…it is an investment property, and as such, must be reflected as an investment and the ordinary, reasonable, and necessary expenses related to the investment must be reported on Form 1040, Schedule E. On that form you list a description and address of the investment property and include any income received and deduct any expenses paid to arrive at net taxable income or (loss) related to the investment. Then that amount is pulled to the front of Form 1040 to be added, for income, or deducted, for loss, to arrive at your total income for the year.
Just let the seller know that you are making the payments and will be taking the deductions for the interest and taxes paid. Ensure that the year end statement from the Mortgage Company comes to your address and correctly reflects all the payments you have made.
Asking people, in general, specific “highly specialized” tax advice is like asking a tourist for the directions to a famous landmark. You might get a good answer, but then again, you might not.
Please seek professional advice in these and other matters for which you do not have the education and experience…it took me eleven years to become a professional accounting and tax advisor…and, like every other professional, I still learn new things every week. This will also happen to you the more you are involved in real estate.
Why not pay the attorney (for accurate advice & counsel and proper settlements) and the CPA (for accurate advice & counsel and proper accounting and tax reporting) to get it done right and leave you with more of your valuable time to do more deals? You should know what has to be done, but exactly how it has to be done should be left up to the professionals. To me it is no different than when I deal with electrical, plumbing or the many other problems that I encounter with real estate.
Just the way I see things…