BiggerPockets

Deed is your name, mortgage is in previous owners name, you've been paying the mortgage, do you write off the interest? My accountant says I can't...

What is your exit strategy? Did you sell on a land contract or some such? Are you using this as a rental?

Here is a good resource for you from Bill Bronchick:

Tax Issues On A Subject-To Deal

Check the first result.

My suspicion is that there is more to the story. I think you really have to know the exit strategy and not just how the property was purchased.

Ok allow me to start over ;)

I received the deed to a ****ty property in the hood for free. It was 3 months behind on the mortgage. I accepted the deed, got a power of attorney, and caught up the mortgage. I did some minor renovations to make the property renovated, and I've been renting it out for the last 3 years. I don't plan to sell it since it cash flows and the balance of the mortgage is about what it's worth. I will probably rent it for another 10 years or until the original seller *****es that a mortgage is still on his credit.

My accountant says she had just tried to do this, and the IRS came back and wouldn't allow it, I'd have to get more specifics. She did say that you must be the one responsible for the debt. I argued that I am responsible because it is a lien on my home, but she said that it must actually be in my name.

Not many accountants are going to know how to take an interest deduction on a subject-to deal. Most regular human beings don't know what a subject-to transaction is. To say to get a new accountant is unfair. To be realistic I should probably have to expect to research this on my own and provide the information to my accountant.

Dan,

You are allowed to deduct the interest on any property in which you have a financial interest. That includes being listed on the deed. If the IRS questions simply show them a copy of the deed and they will not argue. Since you stand to lose if the property is foreclosed on.

The loan itself does not have to be in your name.

-Steven the Tax Guy
Your guide to IRS laws, rules and regulations.

@Bill What happens is the Form 1098 submitted to the IRS will not have his name on it. So when the IRS's computer is matching the information it will generate a mismatch and send him a letter telling him to prove the interest deduction or pay. Spouses that are splitting, the who are claiming the interest if they are not the primary get those letters all of the time He can show his payment history as well as the deed and it will go away.

As I said and @Bill Walston agreed with in another thread.

"It may be time to find another accountant."

-Steven the Tax Guy.

The seller is not entitled to take the interest deduction, regardless of the "financial interest." Not only is he/she no longer on the deed, he/she is no longer paying the interest - the sub2 buyer is. If discovered, the IRS would disallow the seller's attempt at the deduction.

Has anyone been audited and was OK with this deduction?

My accountant says that if I took a property subject-to with a $500 interest only payment, and a $500 rent, that I'd have to pay tax on all that $500 rent and would not be able to take the interest as a write off. That doens't make sense to me. She disagrees with me and says she has proof from past audits.