Case — Home Mortgage Interest Deduction

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TL Case Summ

THE QUESTION

Can taxpayers deduct mortgage interest on a residence when the property title and mortgage are held in a relative’s name?

THE DISPUTE

Taxpayer Says: The relative obtained the mortgage and legal title as a convenience. Taxpayers occupied the home and made all mortgage payments. The mortgage interest is deductible.

Internal Revenue Service Says: Taxpayers had no legal obligation to make mortgage payments and did not hold legal title to the residence, so they are not entitled to deduct the mortgage interest.

THE LAW

From Internal Revenue Code Section 163(a): Generally allows a deduction for all interest paid or accrued within the taxable year on indebtedness.

From Internal Revenue Code Section 163(h)(1): Provides that noncorporate taxpayers generally cannot deduct personal interest.

From Internal Revenue Code Section 163(h)(2)(D): Qualified residence interest is excluded from the definition of personal interest.

From Internal Revenue Code Section 163(h)(3)(A): “Qualified residence interest” is interest paid or accrued on acquisition indebtedness or home equity indebtedness with respect to any qualified residence of the taxpayer.

From Golder v Commissioner, T.C. Memo. 1976-150, affd. 604 F.2d 34, 35 (9th Cir. 1979): To be deductible, the indebtedness must be an obligation of the taxpayer and not an obligation of another.

From Uslu v Commissioner, T.C. Memo. 1997-551: Where the taxpayers are equitable and beneficial owners of the property, enjoying exclusively the burden and benefit of the property, payments of interest are deductible. (Editorial Note: See also Federal Tax Regulation 1.163-1(b))

THE CAUSE OF THE DISPUTE

In addition to meeting other requirements, to claim a mortgage interest deduction you generally must be the legal or equitable owner of the real property securing the mortgage. Legal title is a matter of state law. You may be considered an equitable owner when you assume the benefits and burdens of ownership.

In this case, while admitting legal title of both the residence and the related mortgage is in the name of a relative, the taxpayer contends that occupying the home and making all payments on the mortgage results in equitable ownership, and the interest is deductible. The IRS says because the mortgage and title were in the relative’s name, the taxpayer had no legal obligations or rights, and the interest is not deductible.

WHAT WOULD YOU DECIDE?

Make your selection, then see “The Court’s Decision” below for a full explanation

For the or for the

THE COURT’S DECISION

Download (PDF, 21KB)

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HL Carpenter, an experienced investor and a CPA, specializes in reader friendly articles on taxes and investing for individuals and small businesses, and publishes two newsletters: Taxing Lessons and Top Drawer Ink. Visit TaxingLessons.com and HLCarpenter.com.

This information should not be considered legal, investment or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment or tax advice. Always consult your legal, investment and/or tax advisor regarding your personal situation.

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Right answer!
Sorry, wrong answer :(
For the taxpayer. Taxpayers held exclusively the burden and benefit of the property, and were the equitable and beneficial owners. The interest is deductible.
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