The federal income tax deductions available to homeowners, such as for mortgage interest and property taxes, can save you a lot in tax if you're eligible to take them on your return. However, if your parents bought you a home, your ability to take these deductions will depend on the mortgage terms and whether you're the legal owner of the home.
Mortgage Interest Requirements
There are a few requirements that must be satisfied to take a deduction for the interest payments on your home's mortgage. First, you must itemize your deductions on Schedule A since this is the only way to deduct mortgage interest. However, before deciding to itemize just to deduct mortgage interest, you may want to consider whether the standard deduction will give you a bigger tax deduction than itemizing will. In addition, the mortgage must be a secured debt on a “qualified home” that you have a legal ownership interest in.
For the home your parents bought to qualify for tax deductions, it must either be your main home, which is the place you normally live throughout the year, or a second home that you use for personal purposes. If it's a second home, it isn't required that you actually use it during the year. Rather, it merely requires that the home be available for your personal use and not rented to tenants, treated as an investment or used for business purposes. If you own at least two other homes that you deduct mortgage interest on, you've already reached the maximum of two qualified homes and you won't be able to deduct the interest on the one purchased by your parents.
The IRS also requires that the mortgage be a secured debt, meaning the mortgage terms state that the qualified home serves as collateral in the event payments aren't made. However, your name – not just your parents' – must be included in the mortgage document. In other words, you must have some legal liability for the mortgage payments to deduct the interest. As a result, reimbursing your parents for mortgage payments that only they're responsible for making isn't sufficient for taking the mortgage interest deduction.
Like the mortgage interest deduction, the deduction for property taxes you pay on your home can be taken only on Schedule A. You can deduct all property tax payments you make during the tax year, but only if your local government agency imposes the tax on you. This means you must be the legal owner, meaning your name is on the deed, of the home since this is generally the basis on which local governments determine who is liable for paying the property tax on a home. If the deed is in your parents' names, only they, not you, can take the deduction for property taxes.
Michael Marz has worked in the financial sector since 2002, specializing in wealth and estate planning. After spending six years working for a large investment bank and an accounting firm, Marz is now self-employed as a consultant, focusing on complex estate and gift tax compliance and planning.