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Dave
Dave, Bookkeeper
Category: Tax
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Experience:  Four years doing books, taxes, and accounting
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Does a co-borrower on a HELOC get to deduct the interest paid

Resolved Question:

Does a co-borrower on a HELOC get to deduct the interest paid on the HELOC as an itemized deduction if he lives in the home but is not an owner of the home, (his name is XXXXX XXXXX the title) but his name is XXXXX XXXXX HELOC as a co-signer?
Submitted: 5 years ago.
Category: Tax
Expert:  Dave replied 5 years ago.
Good morningCustomerand welcome to Just Answer!

Only one person on the loan can deduct the mortgage interest on a HELOC as an itemized deduction (although the interest deduction can be split in certain circumstances). In order to be able to take the mortgage interest deduction 3 items need to be met.

You need to meet the all the following requirements in order to deduct your mortgage interest:

  • You must file Form 1040 and itemize deductions on Schedule A (Form 1040).
  • You must be legally liable for the loan. You cannot deduct payments you make for someone else if you are not legally liable to make them. Both you and the lender must intend that the loan be repaid. In addition, there must be a true debtor-creditor relationship between you and the lender.
  • The mortgage must be a secured debt on a qualified home.
If both you and the borrower both meet all of the above requirements and are both listed on the loan itself and you both contribute towards the payment, you would both be able to split the interest deduction in the amount of interest that each of you actually paid, or the person who is on the loan and makes the entire payment would be the one who would take the interest deduction. Please let me know if I can be of any further assistance. Thank you for using Just Answer and please remember to leave Feedback after you click the Green Accept button. Have a great upcoming weekend and good luck with everything.

Ps: If you share the mortgage interest deduction with another person, but you are not named on Form 1098 (which is the form the lender sends you showing the mortgage interest that was paid during the year), you’ll want to create and attach a short and simple statement to your Schedule A that says how much of the interest you each paid and gives the name and social security number of the person who received the 1098.
Customer: replied 5 years ago.
Hello Dave,
Thank you for your answer to my question. However I need a little more clarificaiton. The three requirements you listed do not specifically answer my question: "Does the co-borrower's name need to be on the title of the home used as collaterol? " This is a yes or no question.

The three requrements you listed are all met. Are you implying that if the 3 requirements you listed are met then my specific question is moot and does not require an answer of yes or no?

There is also an ambiguity about whether or not a statement has to be attached to the return. If the co-borrower's name IS XXXXX XXXXX 1098 but the social security number is XXXXX the home-owner who did NOT pay the interest, does a statement need to be attached showing who paid the interest? I suppose the statement has to be attached to the returns of both co-borrowers on the HELOC?

Thank you very much for addressing these further details.
Karin
Expert:  Dave replied 5 years ago.
Good morning Karin and thanks for the follow up. The co-borrower's name does not need to be on the title to the home in order to be eligible to take the mortgage interest deduction. As long as the co-borrower is listed as a borrower on the loan, there is a true creditor-debtor relationship created and the co-borrower is legally liable for the loan as well as the borrower. As long as the three requirements are met, the person who is making the payments would be the one who is eligible for the deduction. If both borrower's are making the payment, the deduction could be split accordingly to the amount of interest each person paid on the HELOC. As for your last question, I am a little confused about. It sounds like you are stating the co-borrower's name is XXXXX XXXXX the 1098 form, but he borrower's social security number is XXXXX on the 1098 form. If this is the case, this needs to be corrected with your mortgage lender so that they name matches the social security number on the form. However, If the person claiming the mortgage interest deduction is not the person listed on the 1098 form then a short statement should be made explaining this. The person's name and social security who is listed on the 1098 form should be provided in the statement as well. Hopefully, that clears up your questions. If not, please let me know and I will be happy to assist with this matter further. Thank you for using Just Answer and please remember to leave Feedback after you click the Green Accept button. Have a great upcoming weekend and good luck with everything.
Customer: replied 5 years ago.
Hi Dave,

Thanks for you answer about the name of the co-borrower not having to be on the house title. I am satisfied with that answer.

I was not clear to you about how the 1098 is worded. Both the borrower's and the co-borrower's names are XXXXX XXXXX the 1098, but only the borrower's social security number is XXXXX I'm sorry for the confusion I caused there by not being clear about how the 1098 is worded. So now that I've clarifed that point, should a statement be attached to both returns if it is the co-borrower who itemizes and uses the deduction?

So that brings up the final question since the co-borrower would get a benefit from taking the itemized deduction whereas the borrower doesn't need the itemized deduction (since the standard deduction suffices against the borrower's lower income):
does the co-borrower need to show payments being made directly to the bank from the co-borrower to get the deduction? Currently the co-borrower has been giving the money to the borrower and the payment to the bank has come only directly from the borrower, (who doesn't benefit from the deduction.)

If you say "yes, the co-borrower needs to have paid the bank directly", then we will have to structure the payments directly from the co-borrower in the future to be able to benefit from the deduction on next year's tax return, and will have to give it up this year, since only the borrower made the payments to the bank in 2008. Do you agree with that conclusion?.

I hope I've been really clear with these final questions. Your answers will directly impact how the two tax returns will be done.
Expert:  Dave replied 5 years ago.
1. You will not need to attach a statement to both returns. Generally, the SS# XXXXX the 1098 will only be for the main borrower. Since the co-borrower's name is XXXXX XXXXX the 1098 form, the co-borrower should not have to include the statement at all because their name is XXXXX XXXXX 1098.

2. How the co-borrower makes the payments on the mortgage is not really of great importance. However, in the case of an audit the co-borrower could be asked to prove that he/she indeed made the payments on the HELOC and the IRS could ask for some sort of paper trail (this would be very unlikely and uncommon, especially since the co-borrower is listed on the loan). Therefore, the co-borrower can still take the mortgage deduction if he/she indeed made the payments on the HELOC.

3. Finally, if the borrower and co-borrower do not share a bank account and are not related through marriage it would be highly recommeded that the co-borrower make the payments directly to the mortgage lender for the HELOC for all future payments if he/she plans to continue to take the mortgage interest deduction. This will make everything much simpler in the end.

Please let me know if I can be of any further assistance. Thank you for using Just Answer and please remember to leave Feedback after you click the Green Accept button. Have a great upcoming week and good luck with everything.
Customer: replied 5 years ago.
Hi Dave,

Great answers! Thank you.

For a nice Bonus, (you've spent a lot of time) Is it possible for you to give me a citation in the tax code or IRS literature to back up what you've advised, because I am considering going ahead with taking the deduction on the co-borrower's return even this year, and attaching a statement to the co-borrower's return since the ss# XXXXX the 1098 is for the borrower as the primary, and not the co-borrower, (although both names appear on the 1098) unless you tell me the statement is absolutely unnecessary.

I appreciate your attention to the nitty-gritty details in this issue.

Karin
Expert:  Dave replied 5 years ago.
Publication 936 explains deducting itemized mortgage interest. Go ahead with the statement since the co-borrower's SS# XXXXX XXXXX on the 1098. Here is a link to the publication: http://taxboard.net/TaxHelpArchives/1999/HTML/pub936/p936.html

You can find the information regarding mortgage interest deductions on pages 7-9 of the publication. Here is a short statement from publication 936 regarding mortgage interest deductions for more than one borrower:

More than one borrower. If you and at least one other person (other than your spouse if you file a joint return) were liable for and paid interest on a mortgage that was for your home, and the other person received a Form 1098 showing the interest that was paid dur- ing the year, attach a statement to your return explaining this. Show how much of the inter- est each of you paid, and give the name and address of the person who received the form. Deduct your share of the interest on line 11 of Schedule A (Form 1040), and write “See attached” next to the line. Similarly, if you are the payer of record on a mortgage on which there are other borrow- ers entitled to a deduction for the interest shown on the Form 1098 you received, de- duct only your share of the interest on line 10 of Schedule A (Form 1040). You should let each of the other borrowers know what his or her share is.

Please let me know if I can be of any further assistance. Thank you for using Just Answer and please remember to leave Feedback after you click the Green Accept button. Have a great upcoming week and good luck with everything.
Dave, Bookkeeper
Category: Tax
Satisfied Customers: 697
Experience: Four years doing books, taxes, and accounting
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