Do Beneficiaries of a Trust Get to Deduct Mortgage Interest?
Trusts beneficiaries are allowed tax deductions for interest on their home mortgages even if the trusts are making the mortgage payments. This is different than a trust paying interest on a mortgage loan it owes. The tax consequences stay with the trust if it’s indebted for the mortgage and owns the property. Typically, however, a trust is paying a mortgage obligation of a beneficiary.
Trusts file their own tax returns that are separate from the beneficiaries. A trust, therefore, has independent accounting of its revenue and expenses. The tax impact of expenditures paid by the trust, such as mortgages, stays with the trust unless the trust is paying for the mortgage of a beneficiary. Mortgage interest is a tax deduction for the trust if it owes the mortgage or a tax deduction for the beneficiary if that individual owes the mortgage.
Payment for Beneficiary
The creator of a trust gives the trustee authority to make distributions directly to a beneficiary and pay amounts on behalf of the beneficiary. For instance, trustees commonly pay the rent or mortgage payments of beneficiaries. If a trust pays for a beneficiary’s mortgage, the beneficiary is entitled to any tax benefit associated with the mortgage. The beneficiary does not lose a tax deduction for mortgage interest merely because his payments were made by a trust.
A trust receives a tax deduction for the amount of trust income that is paid to a beneficiary. This is taxable income on the beneficiary’s tax return. Amounts paid by the trust on behalf of the beneficiary are also taxable income for the beneficiary. Consequently, mortgage interest paid by the trust for a beneficiary will increase the beneficiary’s income despite also providing him with tax-deductible interest. This only occurs, however, if the trust pays the mortgage from the trust’s net income.
Simple and Complex
The terms that govern a trust identify whether the entity is a simple trust or a complex trust. Simple trusts must distribute all of their income every year and make no additional distributions. Any trust that lacks these conditions is a complex trust and is allowed to retain undistributed income or make extra distributions of trust principal. Payment by a complex trust of a beneficiary’s mortgage using trust principal does not add to the beneficiary’s taxable income. The beneficiary deducts the interest paid on his mortgage without owing tax on the distributed trust principal.
Brian Huber has been a writer since 1981, primarily composing literature for businesses that convey information to customers, shareholders and lenders. Huber has written about various financial, accounting and tax matters and his published articles have appeared on various websites. He has a Bachelor of Arts in economics from the University of Texas at Austin.