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unrelated mortgagors, splitting interest deduction

There was a thread recently about Sched. A mortgage interest and office-in-home mortgage interest for unrelated taxpayers who jointly own and are jointly liable (co-borrowers) for the secured loan (the interest payment meets all other deductibility tests).

After a false start or two, many stated that a deduction could only be taken by each for what each one actually paid.[1]

Where does it say this? I haven't tried to search the code yet, but Pub

936 does not state that there is any such restricti> You can deduct home mortgage interest if all the following conditions > are met.
* You file Form 1040 and itemize deductions on Schedule A (Form > 1040). > * You are legally liable for the loan. > * There is a true > debtor-creditor relationship between you and the lender. > * The mortgage is a secured debt on a qualified home in which you > have an ownership interest. > You cannot deduct interest you pay for someone else if you are not > legally liable to pay it. Both you and the lender must intend that the > loan be repaid.

Note especially the last paragraph, the only qualification seems to be that you are legally liable to pay it, regardless of whether you or the other legally liable person actually paid it. What am I missing?

-Mark Bole

[1] One respondent said a joint checking account would allow that rule to be ignored. (What about a gift, I wonder?)
Reply to
Mark Bole
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How do you reach that conclusion? The fifth and sixth words of that 'graph are "you pay."

Reply to
Phil Marti

OK, that's why I asked. Actually a sentence I didn't quote from the pub but just now re-read says: "Generally, home mortgage interest is any interest *you pay* on a loan secured by your home".

The fuzzy parts for me are still

1) when the co-borrowers are married, even if filing separately in a separate property state, I've recall reading here that they can split the deduction any way they want (I'll try to find the link if necessary).

2) when co-borrowers pay out of a joint checking account, ditto.

Is there anything stopping one co-borrower from reimbursing the other for some or all of the interest portion of the monthly mortgage payment? Or perhaps they could send in two separate checks for each payment, one for principal, one for interest, or some other split?

Fortunately in the current situation I'm working with, it makes no difference to the household bottom line which taxpayer claims (or could have claimed) the mortgage interest deduction or Head of Household status for that matter, but is the best advice going forward to make sure there is a paper trail of some kind showing interest payments from the one who is expected to be in a higher tax bracket in any given year?

-Mark Bole

Reply to
Mark Bole

Marriage makes them related. The original question is about unrelated owners.

Watch out if they're in a common-law marriage state! ;-)

Reply to
D. Stussy

And why or how are the rules different for related people filing separately, when it comes to the home mortgage interest deduction? Sorry if I'm being dense...

-Mark Bole

Reply to
Mark Bole

It seems to me it shouldn't make a difference, except to the extent that an unmarried person's paying another's share of the mortgage interest is a taxable gift.

Stu

Reply to
Stuart A. Bronstein

A court case last summer (Njenge v. Commissioner) held that when the occupant of a home paid all the mortgage and taxes (and upkeep, etc.) when the home was owned by their son and the mortgage was in the son's name, merely as a convenience to the occupant because they couldn't qualify for a mortgage, the occupants were held to be equitable and beneficial owners of the home and thus entitled to mortgage and tax deductions.

Note that payment is still key here, but this conclusion was one I hadn't considered before reading the case.

Tom Healy, CPA, CSA Boulder, CO

Reply to
Tom Healy CPA

The issue is true (equitable) ownership rather than mere ownership of record. This issue comes up fairly often in the context of living trusts.

You might say that living trusts are grantor trusts, so that's not the same. But in fact when one person is the title owner and another has an equitable interest, the property is legally held in trust for the equitable owner, and that will normally be considered a grantor trust. In most if not all states the law says that any trust not designated as irrevocable is revocable.

Stu

Reply to
Stuart A. Bronstein

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