Home Interest Deduction – Even When It’s Not in Your Name

Your Guide to State, Local, Federal, Estate + International Taxation

There are various circumstances where a taxpayer could be making payments on a mortgage, but not hold legal title to the property. One example could be, the child of a taxpayer that could not obtain financing, so mom and dad hold legal title, but the child makes all payments and lives in the residence. Whatever the situation, the taxpayers should be careful to be sure they can qualify for the mortgage interest deduction.

In a recent Tax Court Summary Opinion, it has been decided that a taxpayer can claim home interest deductions for making payments on a mortgage even though the mortgage was not legally owned by the taxpayer. In order for the taxpayer to claim the home interest deduction, there has to be an oral agreement granting the taxpayer an interest in the home in return for paying the mortgage and property expenses, along with the taxpayers’ name ultimately being added to the legal title. This will result in the taxpayer becoming an equitable owner of the property.

According to the IRS code, a taxpayer is allowed a deduction for interest paid or accrued on qualified residence interest, which includes interest paid on acquisition debt with respect to any qualifying residence of the taxpayer. A taxpayer may report a home interest deduction if the interest he paid is on a mortgage on real estate of which he is the legal or equitable owner, even though he is not directly liable on the bond or note secured by the mortgage.

Here are a few factors that can help you determine whether benefits and burdens of ownership have been transferred to a taxpayer:

  1. The taxpayer has a right to possess the property and to enjoy the use, rents, or profits thereof.
  2. The taxpayer has a duty to maintain the property.
  3. The taxpayer is responsible for insuring the property.
  4. The taxpayer bears the property’s risk of loss.
  5. The taxpayer is obligated to pay property taxes, assessments, or charges.
  6. The taxpayer has the right to improve the property without the owner’s consent.
  7. The taxpayer has the right to obtain legal title at any time by paying the balance of the purchase price.

No matter what your situation, the presumption is that the taxpayer with legal title is also the beneficial owner of the home. This presumption may be rebutted, but you’ll need to be sure to have clear and convincing proof. Be sure to document your understanding and agreement!

By Daniel Blackwell