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Wendy Reed
Wendy Reed, Enrolled Agent
Category: Tax
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Experience:  15+ years tax preparation and tax advice.
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My sister helped me purchase a rental property by taking ...

Customer Question

My sister helped me purchase a rental property by taking out a loan as I had issues with my credit. I put up all the money for the down payment, made all the monthly payments on the loan, managed the property, and was included on the deed of the property. Am I entitled to claiming the interest paid on the mortgage as well as the other costs for repairs, etc.?
Submitted: 6 years ago.
Category: Tax
Expert:  Wendy Reed replied 6 years ago.

Hello there,

This question is a good one, and this topic has been a hotly debated issue. In the past, a taxpayer had to be the legal owner of the property and also had to be legally liable for the loan, which meant that his or her name had to be on the mortgage. Treasury Reg. 1.163-1(b) states that (I'm paraphrasing but I am including the link to the actual regulation) a taxpayer may deduct mortgage interest that he or she pays, even though his or her name is XXXXX XXXXX the mortgage loan, providing he or she is the "equitable" owner of the property. Tax court has interpreted this regulation in a way that says that the taxpayer is legally liable for the loan (must pay it to prevent foreclosure) even though his or her name is XXXXX XXXXX the loan. For the text of the regulation, see:

http://a257.g.akamaitech.net/7/257/2422/12feb20041500/edocket.access.gpo.gov/cfr_2004/aprqtr/26cfr1.163-1.htm

For a discussion of this issue and references to related tax court rulings, see:

http://www.washingtonpost.com/wp-dyn/content/article/2006/10/20/AR2006102000563.html

If you were my client, I would say that you would be able to deduct the mortgage interest since your name is XXXXX XXXXX deed. However, I would also recommend that your name be added to the loan or that you assume the loan (or get your own mortgage loan) as soon as feasibly possible.

Wendy Reed, Enrolled Agent
Category: Tax
Satisfied Customers: 3346
Experience: 15+ years tax preparation and tax advice.
Wendy Reed and 2 other Tax Specialists are ready to help you
Customer: replied 6 years ago.
Thank you, Wendy.

I appreciate the answer and this will be very helpful in case I get audited. It's nice to have the cited regulation for future reference.

As you suggested, I'm hoping to assume the loan as soon as possible. (The bank said they would allow it after two years - a little over a year left)

Once again,

Thanks.

Larry
Expert:  Wendy Reed replied 6 years ago.

Excellent Larry,

Have a great day!

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