Can Property Taxes Paid by Bank be Deducted?

[ldreyna]

I'm having a case of "brain freeze"

Can the amount of property taxes paid by the bank as part of mortgage payments (on 1098)be used by the taxpayer on schedule L since they do not have enough to itemize? They are married and the mortgage is for their principle residence.

Can someone comment on this? I want to say YES since it is their property and they are liable even though the bank pays it as part of their mortgage.

Thanks,

Larry

[baystorm]

I'm having a case of "brain freeze"

Can the amount of property taxes paid by the bank as part of mortgage payments (on 1098)be used by the taxpayer on schedule L since they do not have enough to itemize? They are married and the mortgage is for their principle residence.

Can someone comment on this? I want to say YES since it is their property and they are liable even though the bank pays it as part of their mortgage.

Thanks,

Larry

[Ray in Ohio]

I'm having a case of "brain freeze"

Can the amount of property taxes paid by the bank as part of mortgage payments (on 1098)be used by the taxpayer on schedule L since they do not have enough to itemize? They are married and the mortgage is for their principle residence.

Can someone comment on this? I want to say YES since it is their property and they are liable even though the bank pays it as part of their mortgage.

Thanks,

Larry

Yes, they can deduct it. They are still paying it. Just through the mortgage escrow at the bank.

[ldreyna]

Thanks

[JohnH]

What if the escrow account goes negative due to the loan being past due?

[OldJack]

>>What if the escrow account goes negative due to the loan being past due? <<

Its still deductible if the bank issued a 1098.

[grandmabee]

>>What if the escrow account goes negative due to the loan being past due? <<

Its still deductible if the bank issued a 1098.

if the escrow account goes negative the bank will have no money to pay the taxes or insurance. I have not seen one go negative because banks usually won't pay anything if there is no money in the escrow to pay.

[JohnH]

I asked because I just saw my first one last week.

I filed an extension to give me time to think about it.

The client is under the HAMP program, which greatly reduced his monthly payment due to a drastic interest rate cut. The loan was already in trouble and there had been no payments into the escrow account for a long time, but the lender paid the property taxes - I assume to prevent problems with the county. The escrow account showed a negative balance roughly equal to a full year's property taxes and insurance.

[Ray in Ohio]

My thinking is that the T/P still "paid" the R/E Taxes. In theory he now has a loan/liability at the bank since the bank paid it for him. Now if this goes into foreclosure or something like that, I am not sure if he could deduct it.

[JohnH]

My thoughts exactly. Seems he doesn't meet the test of having "paid" the property taxes, but yet if he had paid with a credit card then it would be deductible. If he later defaulted on the credit card he would forgiveness of debt income at that time. (Of course, he'd probably meet the insolvency test and still wouldn't owe tax on the debt forgiveness). Using the credit card analogy he would still have been entitled to the deduction for the property taxes at the time they were paid and the debt forgiveness would be a separate issue - totally unrelated to the deduction.

Following the logic, if his rich uncle paid his property taxes then neither of them would be entitled to the deduction.

So does the lender stand in the place of the credit card company or his rich uncle? I'm probably over-analyzing this....

[Gail in Virginia]

The rich uncle would probably not foreclose on the property, nor would he issue a 1099-A or 1099-C for the debts. Judging from the posts on this board the bank is likely to issue those forms incorrectly, but the will probably issue at least one of them if the loan goes into foreclosure. And I am sure that the bank considers that your client owes them the money they paid our for taxes and/or insurance. I would be comfortable with deducting this the same as if it were paid by credit card.

[kcjenkins]

Effectively the bank just made him another loan for the amount of the taxes, and it's just like the original mortgage, it's deductible.