Have you moved into your mother’s home, paid her monthly mortgage yet have been unable to take a mortgage interest deduction on your federal tax return because you are not named on the loan?
Have you taken over the payments of the folks’ family cabin, will one day become its owner, but are getting no tax benefits because you are not on the title?
If one or both examples fits your case, a recent Federal Tax Court ruling addressing oral agreement for “beneficial” or “deemed” ownership could be a huge benefit.
“In the past we have always advised that only a person that is personally obligated on a home mortgage can take a deduction for the interest they pay,” said Rob Keasal, real estate tax specialist. “The case of Van Phan allowing the deduction for interest by a deemed joint owner is a great taxpayer win.”
According to court documents, here’s what happened:
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. To secure the needed funds, the loan for the property was refinanced. Because of his financial situation, Van Phan was not able to buy the property. He did, however, enter into an oral agreement with his mother and his siblings that he would pay the mortgage and property taxes. It was agreed these payments would increase his equity interest in the home, according to court documents.
During 2010, the legal title to the home was held by Van Phan's mother, brother and father. The mortgage on the home was not held in Van Phan's name. On his 2010 federal tax return, Van Phan claimed a $35,880 deduction for home mortgage interest he had paid on the mortgage loan, court documents stated.
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, the IRS disallowed his home mortgage interest deduction. The Tax Court, however, concluded that Van Phan provided “clear and convincing evidence” that he was an equitable owner of the property in 2010. Hence, he was able to take a mortgage interest deduction for the 2010 tax year.
“We see many cases where two people make payments on a home together that are not married.” Keasal said. “One person may have been the one to get the loan and their name is the only one listed on the mortgage. But often, another person will make payments and want to be able to deduct interest since it is their primary or secondary residence. The Van Phan case allowed them to create an oral contract of ownership for the person whose name was not on the loan and be able to deduct the interest that person paid.”
If you are considering the “deemed” interest deduction, the basic rules would still apply. The residence has to be the primary or second residence and the loan has to be secured to the property. The loan(s) could not exceed $1,100,000 on which the interest is deducted. Therefore, the person whose name is not on the mortgage documents would still need to qualify in all respects for deducting the mortgage interest if she made the payments.
The bad news is that a deemed deduction claim has a good chance of triggering an IRS audit. That’s because there is no 1098 form from a lender to match the interest deduction taken on the person’s tax return.
And, as usual, it’s best to get any understanding in writing.
“I would make sure someone documented their agreement in writing instead of relying on an oral contract,” Keasal said.
As author, nationally syndicated newspaper columnist and talk-show host, Tom Kelly has carved a niche as one of the leading real estate and finance journalists. His book “Cashing In on a Second Home in Mexico: How to Buy, Rent and Profit from Property South of the Border” was written with Mitch Creekmore, senior vice president of Stewart International, and is available in retail stores and on Amazon.com. He and his wife, Jodi, Dean of the Humanities College at Seattle University live on Bainbridge Island, WA. Their four grown children are spread out around the world and their first grandchild, Myles Thomas, makes them goofy with joy. You can connect with Tom on his Facebook page at https://www.facebook.com/tom.kelly.37604303, or check out his website at http://tomkelly.com.
Tom Kelly’s novel “Cold Crossover” is now available in print at bookstores everywhere and in both print and Ebook form from a variety of digital outlets. Follow real estate agent and former basketball coach Ernie Creekmore as investigates the disappearance of his star player on a late-night boat. Check out the national reviews and put “Cold Crossover” on your list.