As parents get older they may need a little help from their kids to cover large bills such as property taxes. If help your parents pay the property taxes on their house, it may seem like you should be able to take the property-tax deduction on your income tax return. But the Internal Revenue Service says otherwise.
You cannot claim property tax payments as a deductible expense unless you hold ownership of the property in question. In situations where you live in the same house with your parents but do not hold ownership, payments are still not deductible.
The IRS rules are simple: You can only take an itemized deduction for taxes you pay on property that you own. If you don't own the property, you can't take the deduction. If your parents don't pay the taxes, they can't take the deduction either.
There is one exception to the IRS rules. If your parents own a house but you live in it and pay the property taxes, mortgage payments and other upkeep costs, you may be able to take the property tax and mortgage interest deductions as an "equitable owner." This exception depends on several other factors, and the requirements may vary by state, so it would be best to consult with a CPA or tax specialist before claiming this exception.
If you're talking about a significant deduction, you may be thinking about having your parents transfer the deed to your name so you can take a property-tax deduction in future years. Be careful before you do this. If you plan to sell the house after your parents die, you may have to pay a capital gains tax on the sale. The tax is based on the sale price minus the cost basis of the home. If you inherit the house, your cost basis will be the fair market value of the house at the time of their death, so your gains will be small if you have any at all. But if they give you the house as a gift before their death, your cost basis will be the same as theirs. If the value of the home has gone up significantly since they bought it, you could be subject to a whopping capital gains tax.
Points to Consider
If your parents itemize deductions on their tax return, the best solution may be to just give them the money to pay the taxes themselves so they can claim the deduction. If you are thinking about purchasing their home, keep in mind that you may end up paying higher property taxes than they currently pay. Many local taxing authorities offer homestead exemptions for the people who live in their home, and many elderly homeowners are eligible for special property tax exemptions and lower tax rates.
Alan Sembera began writing for local newspapers in Texas and Louisiana. His professional career includes stints as a computer tech, information editor and income tax preparer. Sembera now writes full time about business and technology. He holds a Bachelor of Arts in journalism from Texas A&M University.