With all of this news about walking away from properties, foreclosures, bankruptcies, etc., I was heartened to come across this story. In this instance, a couple who had declared bankruptcy several years ago were starting over. When they were unable to qualify for a mortgage, their son stepped in to help. The couple made the payments, but the IRS challenged their right to take the mortgage interest deduction … and lost.
In the case I was reviewing, the couple’s son applied (and qualified) for a mortgage, and bought a home on behalf of his parents. Mom and Dad made the payments through a corporation they owned. Because they were making the payments, they reasoned that there were entitled to the benefit – namely deducting the mortgage interest from their personal tax return.
The IRS objected, claiming that because legal title to the home was in their son’s name, the couple had no right to take the mortgage interest deduction. Their second argument was that because the payments were made in the name of a business, the couple had no right to take the deduction.
Generally speaking, for you to be able to take a mortgage interest deduction, the debt must be in your name, rather than in the name of someone else. Where you are the exclusive occupant of a property, and you make all the payments, it’s easy to show that the debt is yours, and so is the right to the deduction. Conversely, when someone else holds the title and is the named mortgagee, they usually have the right to the deduction, not you. HOWEVER … there is also a question of equitable and beneficial ownership to consider. Equitable and beneficial ownership happens when, even though the house may be in someone else’s name, and they’re on the mortgage, you’re the one paying all of the bills associated with the property. In that case, the court can take a look and has some leeway to switch things up.
That’s what happened in this case. Because the parents were making all of the payments on the mortgage, had paid all of the maintenance costs associated with the home, and were the sole occupants, the court decided that they were really the equitable and beneficial owners of the property. The fact that the mortgage and title were in their son’s name was a matter of convenience. The Tax Court overturned the IRS decision and allowed the couple to claim the mortgage interest deduction on their taxes.
I like this decision because it has the potential to help a lot of people. A struggling couple who don’t qualify for a mortgage can get help from parents, for example. Someone recovering from a bankruptcy can start over without being overly penalized. And a self-employed business owner, ineligible for conventional financing because of state income restrictions, now has the ability to get into the market with some help.