Who Gets the Real Estate Tax Deduction?

By Micah Fraim, CPA

So everyone knows that if you own your house, the mortgage interest, real estate taxes, and (generally) Private Mortgage Insurance, PMI, are deductible on your individual income tax return. The title and loan are in your name and the 1098 comes directly to you. Easy.

Who gets the deduction?Where the situation gets more complicated is if one or more of those things are not true. What if the title is in your name but not the mortgage? Mortgage but not title? Neither? According to the Internal Revenue Code, IRC, Sec.1.163-4(b) gives someone the ability to deduct interest on "real estate of which he is the legal or equitable owner, even though the taxpayer is not directly liable upon the bond or note secured by such mortgage, may be deducted as interest on his indebtedness."

Who gets the deduction? The key to the answer is something many people overlook called "equitable ownership." This essentially means the person bears both the benefits and burdens of the home ownership, even if they are not directly liable for it.
This principle was highlighted in Ndile George Njenge and Ekinde Sone Nzelle Rachel v. Commissioner. In the case, a couple who was dealing with financial difficulties had their son obtain a loan and buy a house for them. The parents lived in the home, maintained it, and paid the mortgage and all other household bills. The IRS disallowed the deductions on their tax return, claiming they were not entitled to them because the title and mortgage were not in their name.
The court overturned the IRS decision. By proving that they received the economic benefit of the home in addition to bearing the economic burdens of it, the couple was able to prevail.

Have questions about who gets the tax deduction in your situation? Please contact Micah Fraim, CPA.

This post is an excerpted version of Who Can Take the Home Interest and Real Estate Tax Deductions?

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