Mortgage Interest Deduction OK for Non-Homeowner

I thought some readers of my blog might be interested in this fairly common topic, for which I did some research.  I see if commonly where a parent buys a home in their name, and more improtantly, using their credit, the a child lives in the home and makes ll the mortgage payments.  Typically, a non-owner cannot take the deduction for the mortgage interest paid and real estate taxes... this discusses the basis of law for which this deduction for the child may be possible...

In a summary opinion, the Tax Court has concluded that a taxpayer could claim home mortgage interest deductions for making payments on a mortgage even though it wasn't held in his name, and even though he didn't hold legal title to the underlying property. An oral agreement granting him an interest in the home in return for paying the mortgage and property expenses, coupled by the fact that his name ultimately was added to the legal title, established that he was an equitable owner of the property.

Background. Under Code Sec. 163, a taxpayer is generally allowed a deduction (within dollar limits) 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 deduct, as home mortgage interest, interest he paid 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. (Reg. § 1.163-1(b))

Courts consider various factors in determining whether the benefits and burdens of ownership have been transferred to a taxpayer. These factors include whether the taxpayer:

• Has a right to possess the property and to enjoy the use, rents, or profits thereof;
• Has a duty to maintain the property;
• Is responsible for insuring the property;
• Bears the property's risk of loss;
• Is obligated to pay the property's taxes, assessments, or charges;
• Has the right to improve the property without the owner's consent; and
• Has the right to obtain legal title at any time by paying the balance of the purchase price.

It's well settled that state law determines the nature of property rights, such as legal or equitable ownership, while federal law determines the appropriate tax consequences of those rights. Under California law, the owner of legal title to property is presumed to be the owner of full beneficial title as well. This presumption may be rebutted only by clear and convincing proof. One way of overcoming the presumption is by showing that there exists an agreement or understanding between the parties evidencing an intent contrary to that which is reflected in the deed.

Facts. In 2008 Van Phan moved into a house on a three-acre ranch in California to help his mother, who was unable to care for the home. He lived at the property during 2010. During this time his mother was in the process of divorcing his father, who left the property before 2008 and did not live there at all in 2010.

 As part of the divorce settlement, Van Phan's mother agreed to pay his father in exchange for his father's interest in the property, and to secure the needed funds, the mortgage loan for the property was refinanced. Because of his financial situation, Van Phan was not able to buy the property. But he did enter into an oral agreement with his mother and his siblings that he would pay the mortgage loan and the property taxes and that these payments would increase his equity interest in the home.

During 2010, the legal title to the home was held by Van Phan's mother, brother, and father, and the mortgage on the home was not held in Van Phan's name. On his 2010 return, Van Phan claimed a $35,880 deduction for home mortgage interest he had paid on the mortgage loan.

Van Phan's sister and sister-in-law refinanced the mortgage loan in 2011, and in 2013 his name was added to the legal title to the property.

In 2013, IRS issued Van Phan a notice of deficiency disallowing his claimed home mortgage interest deduction and imposing the Code Sec. 6662(a) accuracy-related penalty.

Taxpayer victory. The Tax Court found credible Van Phan's testimony that his family had granted him an interest in the property and would allow him to add his name to the title at any time if he paid the property expenses. And, in fact, his name was added to the title in 2013.

Van Phan resided at the property in 2010, consistent with his right to possess and enjoy use of the property. He also took a number of actions consistent with performing his duties, responsibilities, and obligations under the agreement with his family. He made the mortgage payments before, during, and after 2010. He testified credibly that he made the property tax and insurance payments, paid the cable bill, maintained the property, and made improvements to it. As a result of these actions, Van Phan was granted the right to add his name to the legal title to the property. Van Phan also bore a substantial risk of loss because he stood to lose the funds spent to build his equitable interest.

The Tax Court concluded that Van Phan provided clear and convincing evidence that he was an equitable owner of the property in 2010. Thus he was able to take a mortgage interest deduction for the 2010 tax year.

Please give us a call to discuss this or any of our other topics with you, so we can address your specific requirements.

DiSabatino CPA
Michael DiSabatino
651 Via Alondra Suite 715
Camarillo, CA 93012
Phone: 805-389-7300
ww.sharpcpa.com

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