Due to the difficult economy, many individuals are having
difficulty obtaining a loan for a new or a refinanced current home. An alternative for many has been to tap into
the credit worthiness of parents or other family members. In which case, the debt is obtained by and in the name of, a
family member with the understanding of the parties that the occupants of the
home will be responsible for the monthly mortgage payment. The question is: who deducts the mortgage
interest?
Qualified mortgage interest is deducted with respect to
acquisition or home equity indebtedness with respect to any qualified residence
of the taxpayer. Qualified mortgage interest is debt incurred
to acquire, construct or improve a qualified residence of the taxpayer and is secured by such residence.
In most instances, interest can be deducted only by the
person that is legally responsible for the debt. Therefore if a family member enters into an
agreement with another family member for the debt on his home, the interest
deduction could be lost.
There is a potential exception to this limitation however.
If interest is paid on a mortgage which a person is the
EQUITABLE OWNER of even though not directly responsible for the debt, he may
deduct the interest paid.
Taxpayers who are considering using another party to assist
them and ultimately hold the debt on their residence should be thoughtful of
the tax rules when setting up the arrangement.
They should carefully structure a written, enforceable agreement that
clearly identifies them as equitable owners of the property and assigns to them
the corresponding burdens and benefits.
The written documentation will help them demonstrate their intent for
ownership. Then, the key is to act
consistently in keeping with the agreement.
In other words, make all of the mortgage payments, pay all expenses
relating to the property, and be the sole occupants. If you treat the home as your legal home, it
is likely the tax courts will also.
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