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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3991
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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Hello. I had been taking a deduction for the mortgage interest

Resolved Question:

Hello. I had been taking a deduction for the mortgage interest and Line of credit interest for the house that I live in, since I was the one making the house payments. The house was in the name of my mother's trust, with me as beneficiary (I now own the house since her passing this year). The IRS is rejecting my 2011 tax returns due to these deductions. I have the canceled checks showing that I had been making the house payments for that year. Please advise. Thanks.
Submitted: 11 months ago.
Category: Tax
Expert:  Lane replied 11 months ago.

Lane :

Hi,

Lane :

You will have to make a very hard case here ... will probably get pushed back from the front lines could be help upon appeal ... you MAY have somethng calleD "EQUITABLE OWNERSHIP." could be help upon appeal

Lane :

"UPheLD" UPON APPEAL

Lane :

The Tax Court held that a married couple could deduct mortgage interest and property tax payments made from a corporate checking account on a home that was owned by their son. The court held that the taxpayers were equitable and beneficial owners of the property and that the checking account was in essence their personal account. Thus they were entitled to itemized deductions for the payments.


 

Lane :

in the instant case, Ndile George Njenge and Ekinde Sone Nzelle Rachel resided in a home owned by their son. In 2001, their son purchased the home in his name since the taxpayers were unable to obtain financing; however, from the date of acquisition until the date of the trial, Njenge and Rachel made all of the mortgage, property tax and maintenance payments and were the sole occupants of the home.

Lane :

The IRS argued that no deduction for interest and taxes should be allowed since Njenge and Rachel were not the legal owners of the property and were not legally obligated to make any payments. Furthermore, the IRS argued that Camrock had made the payments, not the taxpayers. The court rejected both arguments, holding Njenge and Rachel were the equitable owners of the property since, from the date of acquisition, the taxpayers were the only ones who enjoyed the benefit and bore the burden of the home.

Lane :

If you bear the burden of ownership ... (upkeep, pay the property taxes, live there) and PAY the mortgage, you ave a good case for "EQUITABLE OWNERSHIP."

Lane :

SEE THIS:


This concept extends to taxable entities as well as individuals. This article will begin with individuals and their ownership of a residence. A personal residence will be used and if the mortgage interest and property taxes are deductible thereon.



A taxpayer may generally deduct interest paid or accrued (depending upon the method of accounting) during the tax year. See Sec. 163(a). There are exceptions to this such as personal interest. See Sec. 163(h)(2). Qualified residence interest is what will be discussed in the context of equitable or beneficial ownership. See Sec. 163(h)(3).


In addition, the taxpayer generally may deduct property taxes paid or accrued (depending upon the method of accounting) during the tax year. Generally this tax must be imposed upon the taxpayer. See Reg. 1.164-1. However, as with qualified residence interest, equitable or beneficial ownership will determine which taxpayer (the legal owner or the beneficial owner) will be entitled to the deduction of the property tax.


In summary, a taxpayer could have legal ownership of a residence and yet not have equitable or beneficial ownership. One of the characteristics of this type of ownership is that there is an economic effect. This would include such rights and obligations as: possession, obtain legal title upon full payment of the purchase price, construct improvements, pay property taxes, risk of loss, insure and maintain the property.

Lane :

.

Customer:

Thanks, that's very helpful info.

Lane :

Also see this case:

Lane :

In 1997 the Internal Revenue Service ("I.R.S.") sought to contest the deductibility of interest paid on a mortgage because the taxpayer had no legal obligation on the debt. Uslu v. C.I.R. , 1997 WL 770235 (U.S.Tax Ct.) (U.S.Tax Ct.,1997) The Court found that because the taxpayers were equitable owners and had shown they were liable to the debtors of the mortgage to pay the mortgage they were entitled to the deduction of the interest.

"The Court is satisfied, from all the evidence presented, that petitioners have continuously treated the Alisal property as if they were the owners, and that they, exclusively, held the benefits and burdens of ownership thereof. On this record, the Court holds that petitioners established equitable and beneficial ownership of the Alisal property, and that they were liable to Haluk and Aysun in respect of the mortgage indebtedness. As such, the Court holds that petitioners are entitled to a deduction for the $18,980 home mortgage interest paid by them during 1992." Uslu v. C.I.R., 1997 WL 770235, 5 (U.S.Tax Ct.) (U.S.Tax Ct.,1997).

The two critical factors to glean from this decision are the equitable ownership and an obligation on a debt, whether the debt is that of the obligor under the mortgage itself or another party who has in effect assumed the liability of the obligor under the mortgage.

Lane :

Hope this helps

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3991
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 8 other Tax Specialists are ready to help you
Expert:  Lane replied 11 months ago.

Thanks Marius ... Here's one more:

What constitutes an “equitable” owner of a house? The Tax Court has typically defined an equitable owner as one who:

Has a right to possess the property and to enjoy the use, rents or profits thereof;

Has a duty to maintain the property;

Is responsible for insuring the property;

Bears the property’s risk of loss;

Is obligated to pay the property’s taxes, assessments or charges;

Has the right to improve the property without the owner’s consent;
and

Has the right to obtain legal title at any time by paying the balance of the purchase price.[ii]


From here: http://double-taxation.com/2012/03/01/parent-buys-house-kid-pays-the-mortgage-who-gets-the-interest-deduction/


Thanks for the rating...

Lane


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