Subject to - tax write off?

[Mike Sivert]

I'm thinking of doing a subject to deal. If I continue to pay the mortgage in the the seller's name (with out refinancing) would they claim the mortgage interest tax deduction or do I get to claim that since I am paying the mortgage and hold the deed to the property. 

[Nathaniel Busch]

@Mike Sivert You are entitled to take the deduction for mortgage interest, property taxes, insurance and anything paid out of escrow, assuming your sub2 deal is written appropriately. An appropriate sub2 deal is one that properly conveys the burdens and benefits of ownership to you (there are 7 tests of this per precedent and case law).

Assuming you meet those tests (which you likely do if you used an attorney), you are entitled to the deductions. Reporting the mortgage interest on the return should be done with care, as the IRS does not have a copy of Form 1098 under your SSN (or EIN if business) reporting the interest. There is a special way to report it to get the deduction while not triggering a computerized notice from the IRS disallowing the deduction. Be sure to consult a real estate CPA that is familiar with the process and knows how to properly deal with sub2's / land trust type deals like yours.

Your seller should also be of the understanding that they are NOT taking the deduction. It is good practice to obtain from them the actual 1098 and to remind them that they are no longer entitled to the deduction since they aren't making the payments anymore (again, these things are usually spelled out in the sub2 agreement).

Happy to help if you have any other questions about the process. I deal extensively with creative financing such as sub2's, land contracts, contract-for-deeds, assumptions, land trusts, etc.

NB