Tax Question for Sub2 Deals
When you take title to a property subject to the existing mortgage and start making payments on that mortgage, who gets the benefits of the interest deduction at the end of the year (you or the seller who remains on the note)? Do the "at risk" tax rules apply to keep you from getting the deduction? 
jorge121,
Whoever makes the payments gets the deductions. So if you are the one making the payments after you get the deed you take the decuction.
If you are selling under Contract for Sale then your buyer would get the deductions since he is making the payments.
John $Cash$ Locke
Quote:
On 2003-04-21 18:26, jorge121 wrote:
When you take title to a property subject to the existing mortgage and start making payments on that mortgage, who gets the benefits of the interest deduction at the end of the year (you or the seller who remains on the note)? Do the "at risk" tax rules apply to keep you from getting the deduction? <IMG SRC="images/forum/smilies/icon_cool.gif">
Jorge121:
The "true owner" for tax purposes gets the deductions. Usually, as John points out, that is the person holding the title (i.e., legal title). However, what matters for tax purposes is not legal title, but beneficial title. That is why you can hold legal title in a landtrust and if you are the beneficiary of the landtrust, claim the interest deductions on the loan. (This assumes that you have drafted the landtrust so that it is treated as a revocable trust subject to the grantor trust rules under the Internal Revenue Code. If it is a irrevocable trust, only the trust will get the deductions ... not you personally). The factors the Tax Code looks at to determine if you are the beneficial owner is (not any single one that is determinative): (1) who is the legal owner of the property (the person or entity holding title); (2) who is living in the property; (3) who is responsible for paying the expenses on the property; (4) whether there are options "deep in the money" on the property, and a number of other factors.
However, as I mentioned above, in 95% of the cases, the person or entity holding legal title will be entitled to claim the interest deductions.
As you can see, beneficial ownership is the thing that matters. That is why on a contract for deed, the purchaser can legally claim the deductions; he/she has received beneficial ownership under the contract. the C/D is one of the exceptions to the general rule that "the person holding legal title can claim the interest deductions."
After you have determined who the beneficial owner of the property is, the passive loss rules determine the "useability" of the deductions. If you do not meet the time requirements in the regulations under IRC Section 469, all of the expenses and deductions on the property will be considered passive. That means they can only be deducted against passive income. The rent on the proeprty in that case will be considered passive income. The difficulty will be trying to use the other deductions, especially depreciation, if you have no other passive income.
Hope that helps,
Taxjunkie
The passive loss rules under IRC Section 469 come into play after determining who is the beneficial owner.