In real property law we’ve found that one of the “Sacred Cows” of home ownership is the deduction allowed for the yearly interest paid to your bank on a home loan. The current understanding is that you must be on title to the home, on the loan, and pay the monthly payments in order to qualify for the mortgage interest tax deduction. So, what if a taxpayer isn’t on title and not on the loan? Are they eligible for the mortgage interest deduction?
A recent case, Edosada vs. Commissioner of Internal Revenue, suggests an alternative situation and a major change to real property law. In Edosada, the court held that a taxpayer can deduct mortgage interest payments if the taxpayer can show an “equitable interest” at the time payments were made . “Equitable ownership” interest means the taxpayer has all of the burdens and benefit of ownership, but does not have record title.
So what does this actually mean?
While a taxpayer is still required to make the monthly mortgage payments, being on title may no longer be required to qualify for the mortgage interest deduction. Here’s an example of typical scenario here in California where parents help a child purchase real estate.
Peter and Patricia want to help their child, Chris, purchase a home. They put down $70,000 of the $100,000 down payment; Chris puts down the remaining $30,000. Because Chris has poor credit, qualifying for a loan is a problem. To get approved for a home loan and purchase the property, Peter and Patrica are named on title. They also enter into a Written Agreement which provides that Chris:
- Can possess the home;
- Has duty to maintain the home;
- Has duty to insure the property;
- Bears the risk of the loss in the property;
- Has duty to pay property taxes;
- Can demand title to the home from parents at any time; and
- Can improve home at any time.
Even though not on title and not named on the home loan, Chris may claim the mortgage interest tax deduction.
That’s good news for children who need financial help with real estate transactions. Even so, we recommend consulting with an attorney who is knowledgeable about California real property law as well as one who understands the tax and estate planning ramifications.