John R. Bullis: Claiming home mortgage interest on a home others own
December 8, 2014
We sometimes get the question, "Can I deduct the mortgage interest part of the home mortgage payments I paid even if I am not the owner?".
A new Tax Court Memo decision (Puentes, TC Memo 2014-224) tries to clarify the answer. The facts seem to be: L's brother B bought a house in California in 2002 with a down payment and a mortgage loan secured by the property. B was the sole legal owner of the property. B paid all of the required mortgage payments until he lost his job. In 2010, L and her father lived in the house and paid the property taxes, insurance premiums and mortgage payments.
The lender only listed B's name on the form 1098 that showed $33,097 of mortgage interest paid in 2010. L was not legally obligated to pay the expenses or the mortgage loan. L claimed the deductions saying she was an equitable owner of the house.
The Tax Court agreed L acted admirably to enable her family to retain the home during a time of economic difficulty, but denied her the deductions.
Since L provided no evidence or any clear and convincing proof that she was an equitable owner of the property, no deduction was allowed. Brother B was the sole legal owner of the property from 2002 when he bought it through 2010. California law presumed him to be the full beneficial and equitable owner. L did not contribute to the down payment in 2002 and although she lived in the house and paid certain expenses voluntarily, she was not found to be legally obligated to bear any of the burdens of ownership.
The Tax Court said the presumption that the legal owner is the equitable owner can not be overcome solely by tracing the funds used to make mortgage payments on the property. So L did not have any evidence of ownership and was denied the deduction for the interest and property taxes she paid.
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This is just another illustration of how important it is to work with an attorney when a major change is going to happen. We have seen many instances of where a small payment to get the legal papers done would save a lot of money later.
The deductions might have been allowed to L if she had some evidence of her equitable ownership of the property. Just paying him rent to use the property would not give her an income tax deduction. It sounds like he benefited from her generosity when she made those payments in 2010, not because she owned the property, but because he was unemployed.
By the way, L went to court on the same issue for 2009 and lost, including her appeal to the Ninth Circuit Court of Appeals.
Did you hear? "The best things in life are not things".
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.