divided mortgage interest deduction

Feb 09, 2012 2 Replies

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Grip 14 years ago

Hi All,

I recently learned that my mother in law is having tax issues. I have her convinced to see a professional but it's going to take a few weeks (she's visiting on vacation).

She lives in her own home with a mild mortgage in Maryland. Five years ago, she jointly (1/3 share) bought a second home in West Virginia. She owns it with her nephew and his wife. The each may spend a month there a year total. All three are on the title (Tenants in Common, I think) and all are on the mortgage. The WV house is never rented out.

For the past five years, she has been writing a check to the couple for her share of the mortgage payment. She has been deducting the 1/3 prorated amount of the interest on the cabin (as well as the regular mortgage) from her taxes. Her nephew has been claiming their 2/3 share on his taxes.

The IRS is calling foul and saying the deductions aren't documented enough. She doesn't have more detail than that and the paperwork isn't accessible for a couple weeks. She wouldn't say outright, but I think she's been told she's on the hook for $15K including penalties, etc.

Any perspective of how much trouble mom-in-law is in?

Thanks, G

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ira smilovitz 14 years ago

It's possible the issue arose because she entered the mortgage interest on the wrong line of Schedule A. She should have used line 11 and not line 10.

If the facts are as you presented them, she doesn't have a problem. All she needs to do is show that her name is on the deed and mortgage and document that her payments to the nephew and wife equal 1/3 of the payments made for the mortgage.

Ira Smilovitz Leonia, NJ

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Gene E. Utterback, EA, ABA 14 years ago

She shouldn?t be in any trouble. In order to deduct mortgage interest on your main and second home you need to meet 2 conditions - 1) You have to have a legal obligation to pay the mortgage; and 2) you have to actually have paid the mortgage. So for example, if my brother and I owned a home jointly but he paid all the mortgage payments and I took care of all the yard and housework, HE could deduct the mortgage interest but I could not - because I didn't pay anything.

In your situation the IRS is being obtuse (likely because of the economy and their need to collect as much as they however they can). But as long as she can document that she paid her share you should be fine. Though you may need to take this case to appeals to get it resolved.

Without actually seeing the IRS notice I cannot give you exact advice, BUT I would recommend that you respond to the IRS and tell them that she is on the mortgage and has paid her share. You may also want to take a look at the rules for filing a claim for costs due to an unreasonable delay for two reasons. First, you have to notify the IRS that you may seek costs, secondly - this usually get the attention of a supervisor which can help resolve the case quicker.

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