Generally speaking, mortgage interest is deductible by the owner of a home paying the mortgage, not a tenant or other party. But there are exceptions to the rules.
In a recent case decided by the US Tax Court, Wainwright v. Commissioner,TC Memo 2017-70, the taxpayer was allowed to deduct the mortgage interest for a home he didn’t legally own.
For starters, you’re allowed to deduct most or all of the “qualified residence interest” you pay on your principal residence and one other home, like a vacation home. The deduction is generally limited to the interest paid on the first $1 million of “acquisition debt” used to “buy, build, or substantially renovate” a home secured by a qualified residence. In addition, when permitted by state law, you may deduct the interest on home-equity debt on loans of up to $100,000.
Usually, the legal owner of the home claims the deduction for mortgage interest, but not always.
In this recent Tax Court case, John Wainwright, an aerospace professional and veteran of the US Air Force, has been friends with the homeowner for more than 35 years. The friend had purchased a home in Bethesda, MD, for $95,000. In 2006, Wainwright and his friend refinanced the Bethesda home as co-owners in order to make certain renovations.
During the tax years in question – 2010 and 2011 – Wainwright resided in the Bethesda home. He paid the mortgage and maintained the property both of those years. But the IRS disallowed the mortgage interest deduction he claimed on both years’ tax returns.
To meet the tax law requirements, the mortgage must be the obligation of the taxpayer claiming the deduction, not the obligation of another. However, if a taxpayer is found to be an “equitable owner,” taking state law into account, he or she may be entitled to a mortgage interest deduction. A taxpayer becomes the equitable owner of property by assuming the benefits and burdens of ownership.
In making the determination for this particular case, the Tax Court considered several key factors, including whether Wainwright:
• Had the right to possess the property and to enjoy the use, rents, and profits. • Had the duty to maintain the property. • Was responsible for insuring the property. • Bore the risk of loss of the property. • Was obligated to pay taxes, assessments, and charges against the property. • Had the right to improve the property. • Had the right to obtain legal title to the property at any time by paying the balance of the purchase price.
Based on these factors, the Tax Court concluded that Wainwright was the equitable owner of the home. Therefore, he was entitled to deduct the mortgage interest paid during the tax years in question.
It’s very easy for mortgage interest deductions to fall through the cracks. Ensure that your clients meet the tax law requirements for valuable write-offs.
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a...