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Interest paid by the taxpayer on a mortgage upon real
estate of which he is the legal or equitable owner,
even though the taxpayer is not directly liable upon
the bond or note secured by such mortgage, may be
deducted as interest on his indebtedness. * * *
Only interest paid on a mortgage on property for the period after
the taxpayer becomes the legal or equitable owner of the property
is deductible by the taxpayer as interest on her indebtedness.
Zards v. Commissioner, T.C. Memo. 1995-497 (citing Hyde v.
Commissioner, 64 T.C. 300, 306 (1975)).
State law determines the nature of property rights, and
Federal law determines the appropriate tax treatment of those
rights. See United States v. Natl. Bank of Commerce, 472 U.S.
713, 722 (1985); Aquilino v. United States, 363 U.S. 509, 513
(1960). Thus, whatever rights or interests, if any, petitioner
held in the property during the years at issue must be determined
by applying applicable California law.
Under California law, title to the property of a decedent's
estate vests, subject to administration, in his or her heirs or
devisees and legatees immediately on death. Cal. Prob. Code sec.
7000 (West 2004); Olson v. Toy, 54 Cal. Rptr. 2d 29, 33 (Ct. App.
1996) (citing Dorland v. Dorland, 3 Cal. Rptr. 262, 265 (Dist.
Ct. App. 1960)); Raczynski v. Judge, 230 Cal. Rptr. 741, 745 (Ct.
App. 1986). Such vesting is not contingent on any assent,
acceptance, or election by the heirs. Estate of Taylor v.
Crippled Children's Socy., 108 Cal. Rptr. 778, 781 (Ct. App.
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Last modified: May 25, 2011