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.

As we have ended another April 15th, a recent Tax Court case is a good reminder of what it takes to support a deduction for noncash charitable contributions that perhaps you’ve already given this year or plan to donate in the coming months.

The taxpayer in the case claimed a deduction of almost $28,000 for three separate noncash donations to a charitable organization. The donated items consisted of clothes, household goods and furniture, and various electronics, including computers and a printer. Because of the size of the donations, he was subject to several documentation requirements related to substantiating his donations. These included:

A need to obtain a written acknowledgment from the charity (required any time cash or noncash donations are $250 or more) describing what was donated and when, and stating either that no goods or services were rendered in return for the donation or describing and valuing what the charity provided in return. The acknowledgment must be obtained by the time the tax return for the year of the donation is filed or due, whichever comes first.
A requirement to maintain documentation for noncash donations of the same or similar items (such as clothing, jewelry, furniture, electronic equipment, household appliances) exceeding $500 that (a) indicates the appropriate date each noncash item was acquired, (b) includes a reasonably detailed description of the donated property along with its condition, (c) estimates the purchase price of the item, (d) describes its current retail (usually second-hand or thrift-store) value, and (e) explains how this value was determined (e.g., from the Salvation Army’s online donation guide: http://satruck.org/donation-value-guide).
And finally, a requirement to have the noncash items appraised (by a qualified appraiser) because they were not publicly traded securities and they collectively exceeded $5,000 for the same or similar items included in the donations.
Although the taxpayer had written acknowledgments, they unfortunately failed to make the grade because they didn’t contain a description of the donated items (or contain a reference to separate attachments with descriptions that were reviewed by the charity’s representative who received the donations). In addition, he failed to take pictures of the donated items to support their quality and condition (not a requirement, but it would have been helpful), and most importantly, failed have a qualified appraisal prepared before the items were donated.
If the taxpayer had received a properly completed written acknowledgment by the required deadline, he might have at least salvaged a deduction for $4,999 or less. As it was, the Tax Court threw out the entire almost $28,000 deduction.
This was certainly not a good outcome for this taxpayer, but a helpful reminder that the IRS and the courts take the charitable donation documentation rules seriously.
Feel free to contact us for your Jupiter Tax needs.

Abacoa CPA's

Jupiter, FL

(561) 331-0744

Deducting Mortgage Interest with more than one owner

Donations to Goodwill? Here's the backup you need.