Equitable Ownership and Mortgage Deductions

Posted by Lee Reams Sr. on

You may sometimes encounter a taxpayer who is making mortgage payments on a residence even though he or she is not liable on the loan and therefore is generally unable to deduct the interest. 

However, a taxpayer may deduct, as home mortgage interest, interest he paid on a mortgage on real estate of which he is the legal or equitable owner, even though he is not directly liable on the debt secured by the mortgage. (Reg. § 1.163-1(b))  

In determining whether a taxpayer possesses any of the benefits and burdens of ownership of property, the Tax Court has considered whether the taxpayer:

  • Has a right to possess the property and to enjoy the use, rents, or profits thereof;
  • Has a duty to maintain the property;
  • Is responsible for insuring the property;
  • Bears the property's risk of loss;
  • Is obligated to pay the property's taxes, assessments, or charges;
  • Has the right to improve the property without the owner's consent; and
  • Has the right to obtain legal title at any time by paying the balance of the purchase price. (Blanche, TC Memo 2001-63; Uslu, TC Memo 1997-551) 

    Examples where taxpayers were equitable owners:

    • The taxpayer entered into a binding contract to purchase a residence and took possession of the residence under an “occupancy agreement” while financing was pending. The occupancy agreement made the taxpayer responsible for utility payments and for getting liability and contents insurance on the property. Following a two-month transition period, it also made the taxpayer liable for repairs to plumbing, heating, cooling, electrical equipment and appliances. The purchase contract and the occupancy agreement shifted sufficient burdens and benefits of ownership to the taxpayer to give him equitable title to the property. (Uslu, Saffet, TC Memo 1997-551)
    • The taxpayer's son was the legal owner of the property, but he didn't reside there. The taxpayer lived on the property and covered all expenses and taxes. When the property became rental property, the taxpayer and not the son served as landlord, i.e., finding a tenant and providing all services related to the property. The taxpayer held the burden and benefit of ownership exclusively and so was the equitable owner. The son's name was used solely to procure the mortgage when the taxpayer was having financial difficulties. (Njenge, Ndile G., TC Summary Opinion 2008-84*)
    • Neither title to the property nor the mortgage obligation was in the taxpayer's name, but the taxpayer resided at the property, contributed a significant part of the down payment, and agreed to be responsible for all mortgage payments. (Edosada, Conrad, TC Summary Opinion 2012-17*)

    Examples where taxpayers were not equitable owners:

    • Taxpayers’ sons, who lived with their parents in a residence then owned jointly by their father and uncle, didn't prove they held a beneficial interest in the property under then applicable state (CA) law. This entitled them to deduct mortgage interest they paid where they didn't (i) contribute to the down payment, (ii) show they made any payments for the residence for the 12 preceding years the family lived there, or (iii) show any agreement entered into with their father or uncle giving them an ownership interest. (Daya, Gabriel, TC Memo 2000-360)
    • A taxpayer assumed no benefit or burden of ownership on a home legally owned by her brother. Although she made mortgage payments to help her brother, she couldn't establish that she had any right to possession or use of the property or any obligations for its maintenance. (Puentes, Lourdes, TC Memo 2013-277)
    *Pursuant to IRC Sec 7463(b), summary opinions may not be treated as precedent for any other case.