What's on lot dictates interest deduction


March 11, 2001

It's tax time once again, and questions abound about mortgage interest expense deductions for home mortgages and real estate taxes. Here are answers to some frequently asked questions.

Question. My wife and I bought a building lot and plan to build a home on it in a year or two. We have a mortgage loan on the lot and pay loan interest and real estate taxes. Can we deduct the mortgage interest or real estate taxes?

Answer. You can't deduct the interest as home mortgage interest because there is no home under construction. Once you start construction, your home will qualify as a residence. You then can deduct mortgage interest paid on the lot as well as the construction loan interest, provided the home becomes ready for occupancy within 24 months. Real estate taxes paid on the unimproved building lot are tax-deductible.

Q. My mother put my name on the deed to her house, as a joint tenant, but only my mom's name is on the mortgage. We both live in the house, and I contribute to paying the mortgage and real estate taxes. How do we handle the tax deductions?

A. Since your mother is the only one legally liable for the mortgage, only she can deduct the mortgage interest, even though you paid part of it. You are both legal owners of the home, so each of you can deduct one-half of the real estate taxes. Remember, in order to deduct home mortgage interest or real estate taxes you and your mother must itemize deductions on your tax returns.

Q. My husband and I own a vacation condominium in Ocean City. We don't rent it to anyone, but are considering renting it out next summer. Can we deduct mortgage interest and real estate taxes?

A. You can. You can treat your Ocean City condo as a second home. Mortgage interest and real estate taxes paid on a second residence are deductible. You can continue to treat the condo as a home even if you rent it out for part of the year. To qualify for the home mortgage interest deduction, you must use the home more than 10 percent of the days you rent it out at a fair rental during the year, with a minimum of 14 days personal use. If you rent your condo, it may also qualify as rental property. You should consult your tax adviser or accountant to determine whether it's more favorable to treat your condo as a second home or a rental property.

Q. I paid a $120 ground rent on my home this year. Is it deductible?

A. Yes. Ground rent is treated in the same way as home mortgage interest. Both are deductible, provided you itemize deductions.

Q. I sold my home Aug. 31, 2000. Can I deduct the real estate taxes I paid in July 2000?

A. Real estate taxes must be divided between the buyer and seller according to the number of days in the real property tax year that each owned the property. Since real estate taxes in Maryland are assessed from July 1, the seller can deduct 62/365ths of the annual tax bill, because the seller owned the property for 62 of the 365 days in the July 1, 2000, to June 30, 2001, real estate tax year.

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