Deducting Mortgage Interest When More Than One Owner Is Liable
Subject to certain limitations, home acquisition debt is deductible as an itemized deduction. Home acquisition debt is debt incurred to acquire, construct, or substantially improve your main or second home. The debt must be secured by the home and is limited to $1 million ($500,000 if married filing separately). To qualify for deduction, you must generally be liable for the debt. When more than one taxpayer is jointly and severally liable on the debt, the taxpayer who makes the mortgage payments is entitled to the deduction with respect to those payments.
The IRS addressed who is entitled to the mortgage interest deduction when two individuals who are jointly and severally liable on the mortgage make mortgage payments from a joint account or from their separate funds. According to the IRS, funds paid from a joint account with two equal owners are presumed to be paid equally by each owner (without evidence to the contrary). However, if the mortgage interest is paid from separate funds, each taxpayer is entitled to deduct all of the interest he or she pays with separate funds.
Situation 1. Taxpayers are a married couple and are jointly and severally liable on a mortgage, but one spouse dies during the year and the bank issues a Form 1098 under the deceased spouse’s social security number. The surviving spouse files a separate return.
In the year of death, if the surviving spouse files a separate return, the deceased spouse’s return should include income and deductions to the time of death. In determining the amount of interest deductible on the deceased spouse’s return—
If the interest payments are made from the couple’s joint account, half of the interest paid before the time of death is deducted on the deceased spouse’s return. The remaining interest is deductible on the surviving spouse’s return.
If the interest payments are made from the deceased spouse’s separate funds, all of the interest paid before the time of death is deducted on the deceased spouse’s return. The remaining interest is deductible on the surviving spouse’s return, assuming it is paid by the surviving spouse.
If all of the interest payments during the year are made from the surviving spouses separate funds, no interest is deducted on the deceased spouse’s return. All of the interest is deductible on the surviving spouse’s return.
Presumably, if the couple resides in a community property state, interest paid before the deceased spouse’s death would be split equally between spouses if paid with community property funds and the separate funds rule would apply only to payments made with separate property funds.
In following years, as the surviving spouse is liable on the debt, he or she will be entitled to deduct any interest he or she pays on the mortgage, assuming all other requirements are met.
Situation 2. Taxpayers are an unmarried couple and are jointly and severally liable on a mortgage, and the bank either issues a Form 1098 under only one social security number, or both. Since both taxpayers are liable on the mortgage, both are entitled to claim the mortgage interest deduction to the extent it is paid by either taxpayer. If the interest is paid from separate funds, each taxpayer may claim the mortgage interest deduction for amounts paid with their own separate funds. If the mortgage interest is paid from a joint bank account it is presumed that each has paid an equal amount absent evidence to the contrary (Rev. Rul. 59-66).
Situation 3. Related persons co-own a house and are liable on a mortgage note. A bank may issue a Form 1098 under the name of one or both of the co-obligors. If co-owners of the house are both liable on a mortgage, each one may take a deduction for the amount each one pays subject to the limitations.
Note: In general, to claim an interest deduction it is necessary to be liable on the note. However, taxpayers can deduct interest paid on a mortgage if they are the legal or equitable owner of the mortgaged real estate, even if they are not directly liable on the debt (Reg. 1.163-1). An equitable owner is a person who has the economic benefits and burdens of ownership, based on the facts. Occupying and maintaining the home and paying the mortgage and taxes on it are factors that might indicate equitable ownership.