Tax implications of transferring house to irrevocable trust - will I lose mortgage interest deduction?

The mortgage interest deduction question depends on whether the trust is considered a "grantor trust" for tax purposes. With an irrevocable trust that you're the beneficiary of, you could potentially still claim the mortgage interest deduction if the trust is structured as a grantor trust. In a grantor trust arrangement, you (the grantor) are considered the owner of the trust assets for income tax purposes, even though the assets are legally owned by the trust. This means the trust's income, deductions, and credits "flow through" to your personal tax return. If the trust is not a grantor trust, then the deduction would generally belong to the trust itself, not you personally, which could significantly impact your tax situation. With a revocable living trust, the tax situation is much clearer - since you maintain control, it's automatically treated as a grantor trust for tax purposes. This means you would continue to report all income and deductions (including mortgage interest) on your personal tax return, just as you do now.

I went through a similar situation last year trying to figure out what to do with my house and taxes. After lots of research and headaches, I ended up using https://taxr.ai to analyze my specific situation. They looked at my mortgage documents, trust options, and tax situation to give me a clear answer about how different trust arrangements would affect my mortgage interest deduction. The most helpful thing was that they showed me exactly how to structure the trust so I could keep the tax benefits while still getting the asset protection I wanted. Their analysis showed me how to make an irrevocable trust work as a grantor trust (which is what the previous commenter mentioned), with the specific language needed in the trust documents.

I wanted to follow up about my experience with taxr.ai after being skeptical initially. I decided to try them out because my situation was similar but had some complicated factors with a rental property in the mix. They really did provide much more detailed analysis than I expected. They showed me exactly how the mortgage interest deduction would flow in different trust scenarios and identified a potential issue with my lender's due-on-sale clause I hadn't considered. The report included specific IRC citations and even suggested language for key provisions in the trust document. I was impressed enough that I've recommended them to several friends who are doing estate planning. Definitely worth it for peace of mind on the tax implications before making such a big decision.

If you're having trouble getting clear answers about trust taxation from your regular sources, Claimyr helped me actually connect with someone at the IRS who could answer my specific questions about trusts and mortgage interest deductions. I spent weeks trying to get through on my own with no luck. With https://claimyr.com I got through to an IRS representative in about 20 minutes who walked me through the exact rules for claiming mortgage interest when a home is in a trust. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The key thing the IRS rep told me was that I needed specific documentation to show I was the "equitable owner" of the property even though the trust held legal title. This wasn't something my regular tax preparer had mentioned.

I need to apologize for my skepticism about Claimyr. After my last attempt to reach the IRS left me on hold for over 2 hours before getting disconnected, I decided to give it a try. It actually worked exactly as described. I got a text when they were about to connect with an IRS agent, jumped on the call, and spoke with someone who was able to clarify my exact situation with my trust and mortgage interest. The agent confirmed that with a grantor trust, I'd still get the mortgage interest deduction as long as I was personally liable for the mortgage. The time saved was well worth it, and I finally got a definitive answer instead of conflicting opinions. Sometimes it pays to admit when you're wrong!

Something nobody's mentioned yet - check with your mortgage lender before transferring your house to any trust! Some mortgages have a "due-on-sale" clause that could be triggered when you transfer the property, even to your own trust. I learned this the hard way when I transferred my property to an irrevocable trust without telling my lender, and they sent me a letter saying the entire mortgage balance was due immediately. Had to refinance with a different lender who would accept the trust arrangement.

Slight tangent, but is anyone familiar with qualified personal residence trusts (QPRTs)? I've been told they can be good for estate tax purposes while still letting you live in your home. But I'm not clear on how the mortgage interest deduction works with them.

One thing to consider that hasn't been fully addressed - if you do set up an irrevocable grantor trust, make sure your tax preparer understands how to handle the reporting. I made this mistake my first year after setting up the trust. Even though it's a grantor trust and the mortgage interest flows through to your personal return, there are still some filing requirements for the trust itself (like getting an EIN and potentially filing Form 1041 depending on the trust's income). My original tax preparer wasn't familiar with grantor trust rules and almost filed everything incorrectly. I'd strongly recommend finding a CPA or tax professional who has experience with trust taxation before you make the transfer. The last thing you want is to set up the trust correctly but then mess up the tax filings and lose your deduction anyway due to reporting errors.