Ask The EDD Attorney – May I Deduct Home Mortgage Interest If My Name Is Not On The Title To The Property?

By Robert S. Schriebman

January 22, 2015

Introduction

May I deduct home mortgage interest if my name is not on the title to the property? This issue had haunted me for quite some time. I have discussed this issue with both IRS auditors and attorneys and have been told that a taxpayer’s name must be on the title of the real estate in question in order to allow a deduction for mortgage interest paid by that taxpayer. It has been several decades since a court has taken up the issue the last time the U.S. Tax Court decided this type of case was back in 1977. On January 13, 2015, the U.S. Tax Court, in an unpublished opinion, held that home mortgage interest is deductible by the person who actually pays the interest even though his or her name is not set forth on the deed.

The Case of Q.V. Phan, Tax Court Summary Opinion 2015-1

In 2008, Mr. Phan moved into a house on a three-acre ranch in California owned by his mother who was in the process of getting a divorce from his father. In order to reimburse the father for his equity the property was refinanced in 2010. Mr. Phan’s mother could not pay the new mortgage. The new deed was in the name of Mr. Phan’s mother and his siblings. Mr. Phan did not want to go on title because he had creditor problems. However, pursuant to an oral agreement with his mother and siblings, Mr. Phan made regular monthly mortgage payments to Chase bank, but his name was not on the title until 2013. He also paid the property taxes and utilities.

Mr. Phan deducted almost $36,000 in home-mortgage interest on Schedule A on his 2010 IRS return, Form 1040. The IRS audited Mr. Phan and disallowed all of his home-mortgage interest because his name was not on the title. He was given a hefty tax bill by the IRS, and I presume the FTB likewise hit him with tax deficiencies.

IRC § 163(a) allows a deduction for all interest paid or accrued within the taxable year on indebtedness. IRC § 163(h)(1) does not allow any deduction for personal interest. Qualified residence interest is excluded from the definition of personal interest and is deductible under § 163(a). Qualified residence interest is any interest that is paid on home equity indebtedness.

The indebtedness generally must be an obligation of the taxpayer and not an obligation of someone else. Under an obscure IRS regulation (1.163-1(b)), even if a taxpayer is not directly liable on a note secured by a mortgage, the taxpayer may nevertheless deduct the mortgage interest paid if he or she is the legal or equitable owner of the property subject to the mortgage. The problem is that no one pays any attention to this little regulation, and no court has visited this issue since 1977 (Baird v Commissioner, 68T.C. 115, 1977).

The “equitable owner” is the true owner of the property even though his or her name is not on the deed – the deed signifying who is the “legal owner.”

Under California law an individual can prove that he or she is the true equitable owner by showing that there exists an agreement or understanding between the parties evidencing an arrangement contrary to that which is reflected in the deed. See Marriage of Fossum, 121 Cal. Rptr. 3d 195, 202 (Ct. App.2011).

How Mr. Phan Won His Case

Mr. Phan testified credibly that his family had granted him an interest in the property and would allow him to add his name to the title at any time if he paid the property expenses. Mr. Phan’s mother and siblings would not have been able to stay in the family home unless Mr. Phan made the mortgage payments. When Mr. Phan cleared up his personal creditor issues in 2013, he was allowed to formally add his name to the title of the property. He was able to prove to the court that he not only made the mortgage payments but he made the property tax and insurance payments as well as paying utility bills.

Going To Court? Be Prepared!

There is another lesson to learn in Mr. Phan’s victory. If you intend to take your case before any judge you must be able to paint such a clear picture for the judge that the judge has no choice but to rule in your favor. You have to produce favorable testimony from credible third-party witnesses as well as paperwork that will prove your case. If you can not meet this test you should stay out of court.