Hello. I have been looking for some answers on this site for some of the questions that I have, but I have not been able to find them. Hopefully someone out there can help me out...

We just closed an estate. My wife and I were beneficiaries. After 20 months, we finally got the estate settled. I borrowed money from my brother-in-law to pay off a lien that was on the property (we did not know this when the property was transferred into our names). After the lien was paid off, we refinanced, took cash out, and paid my brother-in-law back. We also paid 2004 and 2005 property/school/twp taxes that were not paid, along with other misc. bills. Now that I have given the information above, I have some questions that I need help with...

1. can I claim the 2004 and 2005 property/school/twp taxes on my 2005 tax return since they were both paid at the same time?

2. since the lien that was on the property was 6 years old (no idea why it went so long without them foreclosing on the property), can I claim interest paid to satisfy the lien? I got them to settle the lien for less than the amount that they wanted, but there was a bunch of interest that was still paid.

3. what fees can I claim with regard to the fees of completing the mortgage?
Can these be claimed on federal/state/local?

4. I had settlement at the end of 2005, but never received the check until 2006 (the 3 business day resind period carried over until the new year). Would I have to wait until my 2006 taxes to claim any/all expenses since I never had the check in hand until the new year, or can I claim it on my 2005 taxes since the settlement was completed in 2005?

I think that I about covered everything I need help with. If anyone has other ideas or think that there is any other information that would be valuable, I would really love to hear from you!

Thank you for your time, and I wish you all a great new year...

Chris

Hi,
I have had some experience with this, and believe me, you need to see a CPA.
I have used one now for the past 3 years, and it's about $150 for them to do my taxes for both my wife and I, with dividend income, interest, etc.
The small cost involved is well worth the peace of mind, and having both Federal and State taxes done correctly. Nope, not H&R Block, which I'm sure might be good with this sort of stuff.
But, it's a private small tax CPA office, and they know what they are doing.
I do wish you the best, and will not try answering your questions specifically. I'm not the expert; they are. Best of luck, and please see a CPA.

Chris:

Agree with Fredg that a tax professional is probably your best choice in this case. However, a CPA may be a bit of overkill. An experienced tax professional can handle all the issues you cite below.

Here is my input:

1) Yes, you can claim these taxes as an itemized deduction provided you had the legal obligation to pay them. The taxes, however, should have been paid by the estate using estate liquid assets before the property was transferred to your name. Once the transfer occurred without payment of these taxes, they became your obligation. If, however, you were both the executor of the estate and the sole heir, there is a conflict of interest and a possible violation of duties as the executor. It's possible that the size and/or makeup of the estate made payment of these taxes with estate assets non-advantageous from an income tax point of view. It appears that you transferred the property from the estate to the heir without paying the taxes. You then used estate assets to pay the tax after the transfer. An IRS auditor may argue that you manipulated the situation to yield a significant tax deduction for yourself as the heir. On that basis, he could then disallow the deduction. This is exceptionally unlikely unless the IRS took a real close look at both the estate documents, the estate tax returns (if any) and your own return. The possibility does exist, however.

2) Yes, In my opinion, you can claim the accrued interest on the lien. Did the lienholder provide you with a copy of Form 1098? This form is not critical to claiming the deduction, but it makes the claim more audit-proof.

3) The loan origination fee and any points charged are considered interest and can be deducted in the year that you close on the house.

4) The date on the settlement form determines which year you can claim the deductions.

Wow. Thank you for the detailed response.

We were able to get the lien holder to reduce the amount that they would accept to satisfy the lien. The balance of the mortgage when payment stopped being paid on it was $32,000. The interest over 6 years with penalties and what not took the balance to $63,000. I got the lien holder to accept $37,500 to satisfy the lien. So, my understanding is that I would be able to claim $5,500 in interest? Or would I consider the settlement as a percentage, and reduce the principle and the interest both by that percentage which would yield a higher interest amount? I did not get a 1098, and I do not know if I will. I will check with my attorney to find out if I will be getting one.

Also, you said about paying the taxes out of the estate liquid assets. The reason that we did not do this, is because there were NO liquid assets. We paid all of the deceased's credit card bills and other bills in order to keep the property. There was not much of an option.


Also, I believe that the taxes that I paid for 2004 and 2005 can BOTH be claimed in my 2005 taxes (I think that is what I got from your posting).

Wow, thank you very much

Sincerely,

Chris

Chris:

Based on your response, claim the back taxes on yor 2005 return.

Try to get the Form 1098 before you file, then claim the amount reported on the Form 1098. If the Form 1098 is not forthcoming, then check out the Generally Accepted Accounting Principles for means of determining interest payments. If you use a GAPP method to determine what portion of the $37,500 is considered interest, the IRS will accept it. BTW, In my opinion, based on the facts presented, claiming the $5,500 as interest would not be problem for the IRS.

Thank you for your follow-up!

I called my attorney and the mortgage company and I am having the title searches sent to me that show the principle balance and I have the settlement agreement that shows what was paid to satisfy the lien. I was thinking of calling the original lien holder to see what the original principle amount was when the loan was no longer paid on. A 1098 will probably not be in the mix. I figure if I get audited, I would have this as proof of what was paid and what was the principle, thus the difference would be interest. I will check into the GAPP method (not really sure what this is, but I will definitely do my homework).

Thanks again

Chris

Glad to help!

I received the title work today in the mail that shows the original principle amount. I figure the difference between what we paid and the principle of the loan amount is what we can claim... thank you again for your help!

Chris

Again, glad to help!