Mortgage Interest Deductibility

Beneficial owners can deduct home mortgage interest and taxes The Tax Court held that taxpayers were entitled to deduct mortgage interest and real estate taxes they paid on property owned by their son, because they were the beneficial owners of the property.

The taxpayers resided at the property for all of 2003. During that time, title to the property was in the name of their son, as was the mortgage on the property. Their son had obtained a mortgage loan and took title to the house to procure it for the taxpayers who were unable to secure a loan because of financial difficulties. The son did not live on the property, and the taxpayers paid for all maintenance of, and taxes on, the property. Mortgage payments from 2001 until the time of the trial were made through Camrock General Engineering, Co. Camrock was the taxpayers’ company; one taxpayer was its registered agent and the other its president. After the taxpayers moved from the residence, they served as landlords; they rented the property to a tenant and performed all services related to that tenancy

The taxpayers claimed on their 2003 federal income tax return deductions for home mortgage interest and real estate taxes of $3,522 and $3,194, respectively, on the residence property. The IRS contended that because the taxpayers had no legal obligation to make the mortgage payments and did not hold title to the property, they were not entitled to deduct the mortgage payments. The Service further argued that the taxpayers did not make the mortgage payments; the payments were made by Camrock.

The taxpayers claimed that although their son had legal title to the property, they owned Camrock, and through the company, they had assumed the mortgage from the outset. The payments were made from a bank account registered to the company, of which the taxpayers were signatories. The company was not an active business in 2003, but did have a bank account, which functioned as a personal account for the taxpayers.

Section 163(a) generally allows a deduction for all interest paid or accrued within the tax year on debt. However, under Section 163(h)(1), noncorporate taxpayers generally cannot deduct personal interest. Qualified residence interest is excluded from the definition of personal interest, and the deduction of qualified residence interest is allowed under Section 163(h)(3). The court pointed out that the debt must be the taxpayer’s obligations and not an obligation of another. In Uslu, TC Memo 1997-551, the Tax Court held that when a residence was occupied exclusively by the taxpayers who made all mortgage payments, the debt may be found to rest solely on those taxpayers who were entitled to deduct the mortgage payments.

The Tax Court held that like the taxpayers in Uslu, the taxpayers in the present case were equitable and beneficial owners of the property. The court said that it was undisputed that the property was a “qualified residence” under Section 163(h)(4)(A), and thus the taxpayers were entitled to claim the mortgage interest deductions on the property. As with mortgage interest, the court has held that taxpayers who do not have legal title to property may still deduct property taxes under Section 164(a) if they establish equitable ownership of the property. Because the court found that the taxpayers were the equitable and beneficial owners of the property, the court said they were also entitled to their claimed deductions for real estate taxes.

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