Originally published May 14, 2013
So everyone knows that if you own your house the mortgage interest, real estate taxes, and (in most cases) PMI are deductible on your individual income tax return. The title is in your name, the loan is in your name, and the 1098 comes directly to you. Easy.
Where the situation gets a little more complicated (and where more misinformation is spread) is if one or more of those things are not true. What if the title is in your name but not the mortgage? Mortgage but not title? Neither? A lot of professionals might claim that the mortgage interest would automatically not be deductible in those cases. But let’s see what the Internal Revenue Code says.
Title 26 Section 1.163-4(b) gives someone the ability to deduct interest on “real estate of which he is the legal or equitable owner, even though the taxpayer is not directly liable upon the bond or note secured by such mortgage, may be deducted as interest on his indebtedness.”
The key here is something that many people overlook called “equitable ownership”. This essentially means the person bears both the benefits and burdens of the home ownership, even if they are not directly liable for it.
This principle was highlighted in Ndile George Njenge and Ekinde Sone Nzelle Rachel v. Commissioner, TC Summary Opinion 2008-84. In the case, a couple who was dealing with some financial difficulties had their son obtain a loan and buy a house for them. The parents lived in the home, maintained it, and paid the mortgage and all other bills associated with it. The IRS disallowed the deductions on their tax return – claiming they were not entitled to them because the title and mortgage were not in their name.
The court overturned the IRS decision. By proving that they received the economic benefit of the home in addition to bearing the economic burdens of it, the couple was able to prevail.
Of course, each situation varies. You only want to take the deductions you are actually due. However, if you are in a situation that is somewhat opaque, do not hesitate to contact your CPA to discuss the options available to you.
IRS Circular 230 Notice: To ensure compliance with requirements imposed by the IRS, we inform you that any federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code.