Trust Beneficiary Interest Deduction

[Stuart Bronstein]

Here's a variation on a question that's come up several times before
- the mortgage interest deduction.

I was consulted by someone whose relative had just died owning a home
that was kept in a living trust. The beneficiaries want to keep the
home instead of selling it, so plan to keep the trust (now
irrevocable) for the purpose of maintaining the current mortgage in
place. The beneficiaries will move into the property and keep up the
mortgage payments.

The question is, can they deduct the mortgage interest?

To me this is not as simple as merely say they aren't on the deed or
on the mortgage so they can't. They are now the technical owners,
though the property still remains in the name of the trust.

In one situation where an executor moved into her mother's house and
moved out after the probate was terminated, more than two years
later, my research indicated that she was entitled to the §121
exemption.

Then there's the issue of a partnership. What happens if a
partnership buys a house for non-business purposes, and the partners
live there. The title and mortgage are in the name of the
partnership - can the partners deduct the mortgage interest? If so,
why not trust beneficiaries in the same situation?

This seems to me to be similar to the situation of some condominiums,
where owners get an ownership interest in the entire building or
complex, and are entitled to sole usage of a particular unit based on
contractual rights. In those cases the owners get to deduct their
mortgage interest.

Am I off base?

Thanks for your thoughts.

Stu
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[D. Stussy]

Post by Stuart Bronstein
Here's a variation on a question that's come up several times before
- the mortgage interest deduction.
I was consulted by someone whose relative had just died owning a home
that was kept in a living trust. The beneficiaries want to keep the
home instead of selling it, so plan to keep the trust (now
irrevocable) for the purpose of maintaining the current mortgage in
place. The beneficiaries will move into the property and keep up the
mortgage payments.
The question is, can they deduct the mortgage interest?

Yes.

Post by Stuart Bronstein
To me this is not as simple as merely say they aren't on the deed or
on the mortgage so they can't. They are now the technical owners,
though the property still remains in the name of the trust.

They are still responsible as successors, even if ownership is indirect.
Remember that these trusts are usually grantor trusts (when the grantor
lives) and as such are disregarded entities. After death, the estate first
gets the deduction but it may distribute the right or simply flow it
through. As a flow-through item, the beneficiaries CLEARLY get the
deduction (in their respective shares). As successors, they may assume the
debt, and therefore, they're responsible - and get the deduction.

Post by Stuart Bronstein
In one situation where an executor moved into her mother's house and
moved out after the probate was terminated, more than two years
later, my research indicated that she was entitled to the §121
exemption.

Not the same question. The executor need not be a beneficiary nor a
beneficiary act as executor.

Post by Stuart Bronstein
Then there's the issue of a partnership. What happens if a
partnership buys a house for non-business purposes, and the partners
live there. The title and mortgage are in the name of the
partnership - can the partners deduct the mortgage interest? If so,
why not trust beneficiaries in the same situation?

Partnerships are legally different than estates, trusts, or successors.
It's not the same question.

Post by Stuart Bronstein
This seems to me to be similar to the situation of some condominiums,
where owners get an ownership interest in the entire building or
complex, and are entitled to sole usage of a particular unit based on
contractual rights. In those cases the owners get to deduct their
mortgage interest.
Am I off base?

You have drifted off base.
--
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[Stuart Bronstein]

Post by D. Stussy

Post by Stuart Bronstein
I was consulted by someone whose relative had just died owning a
home that was kept in a living trust. The beneficiaries want to
keep the home instead of selling it, so plan to keep the trust
(now irrevocable) for the purpose of maintaining the current
mortgage in place. The beneficiaries will move into the property
and keep up the mortgage payments.
The question is, can they deduct the mortgage interest?

Yes.
They are still responsible as successors, even if ownership is
indirect. Remember that these trusts are usually grantor trusts
(when the grantor lives) and as such are disregarded entities.
After death, the estate first gets the deduction but it may
distribute the right or simply flow it through. As a flow-through
item, the beneficiaries CLEARLY get the deduction (in their
respective shares). As successors, they may assume the debt, and
therefore, they're responsible - and get the deduction.

Thanks. That was what made sense to me, but I didn't know enough about
the taxation of trusts to be certain. My client will be very happy.

Stu
--
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<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
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[Dick Adams]

Post by Stuart Bronstein
Here's a variation on a question that's come up several
times before - the mortgage interest deduction.
I was consulted by someone whose relative had just died
owning a home that was kept in a living trust. The
beneficiaries want to keep the home instead of selling
it, so plan to keep the trust (now irrevocable) for the
purpose of maintaining the current mortgage in place.
The beneficiaries will move into the property and keep
up the mortgage payments.
The question is, can they deduct the mortgage interest?

Whether or not they can keep the mortgage in place
is a California legal question which I am certain you
have covered.

The trust owns the property and the beneficiaries own
the trust. Ergo the beneficiaries own the property and
are entitled to the tax deduction.

Post by Stuart Bronstein
Then there's the issue of a partnership. What happens
if a partnership buys a house for non-business purposes,
and the partners live there. The title and mortgage
are in the name of the partnership - can the partners
deduct the mortgage interest? If so, why not trust
beneficiaries in the same situation?

Obviously.

Post by Stuart Bronstein
Am I off base?

Only an umpire can tell you that for sure. But I can
assure you that ignorance, confusion, and self-doubt
are amongst the several normal conditions through
which the human mind cycles - by the hour for some,
by the minute for others.

Dick
--
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<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

[Stuart Bronstein]

Post by Dick Adams

Post by Stuart Bronstein
I was consulted by someone whose relative had just died
owning a home that was kept in a living trust. The
beneficiaries want to keep the home instead of selling
it, so plan to keep the trust (now irrevocable) for the
purpose of maintaining the current mortgage in place.
The beneficiaries will move into the property and keep
up the mortgage payments.
The question is, can they deduct the mortgage interest?

The trust owns the property and the beneficiaries own
the trust. Ergo the beneficiaries own the property and
are entitled to the tax deduction.

Thanks. I was concerned because my recollection was that discussions
here before indicated that someone had to be both an owner and a
mortgage debtor. Under California law I figured they should qualify
even if their names weren't specifically on the deed or the mortgage,
but wasn't sure about how this would play with the IRS, since federal
law, when there is a conflict, generally prevails.

Stu
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>