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  1. #1
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    Dec 2013
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    Default Who Can Claim Mortgage Interest

    My question involves a marriage in the state of: Michigan. My husband and I are divorcing, but still living in the same house. Our divorce won't be final until May 2014. We agreed to file separate tax returns this year. Our home is deeded in both our names, but the financing is in his name. I have made every mortgage payment and also paid the property taxes and homeowners insurance out of my separate bank account. He claims business use of the home on his taxes. I feel I should be allowed to take the full deduction for the interest and property taxes paid on the mortgage, but since the 1098 comes in his name, I'm not sure that I can do that, or if I can even split it with him.

  2. #2
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    Default Re: Who Can Claim Mortgage Interest

    Unless you challenge the validity of the 1098 issued, it will be assumed correct and he can take the deduction.

  3. #3
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    Default Re: Who Can Claim Mortgage Interest

    Quote Quoting Sybillness
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    My question involves a marriage in the state of: Michigan. My husband and I are divorcing, but still living in the same house. Our divorce won't be final until May 2014. We agreed to file separate tax returns this year. Our home is deeded in both our names, but the financing is in his name. I have made every mortgage payment and also paid the property taxes and homeowners insurance out of my separate bank account. He claims business use of the home on his taxes. I feel I should be allowed to take the full deduction for the interest and property taxes paid on the mortgage, but since the 1098 comes in his name, I'm not sure that I can do that, or if I can even split it with him.
    It is a bit of a sticky situation as the person who can deduct mortgage interest must be the one who both pays and who is responsible for the loan. Neither of you is strictly allowed the deduction if we look at the facts specifically rather than as a whole. As a whole, I would split the deduction between the two of you even though you could play hard and take the whole deduction yourself. I would say husband "paid" the interest on the loan he was clearly responsible for because you are married and are a single economic unit. I would say you were "responsible" for the loan you clearly paid because you were on title of the house and would lose it if the amount were not paid. I know there is some case law out there stating that but I could not find it with a quick search.

    Since this is going to be on a married filing separately return, I do not think you have to really paper around the eventual 1098 if you just split it. If you were to take the whole deduction you would need to see a tax person as he may want to add a statement to your return or even use the specific disclosure form explaining the situation and citing the case(s) that allow for the treatment.

  4. #4
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    Default Re: Who Can Claim Mortgage Interest

    Quote Quoting Welfarelvr
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    It is a bit of a sticky situation as the person who can deduct mortgage interest must be the one who both pays and who is responsible for the loan. Neither of you is strictly allowed the deduction if we look at the facts specifically rather than as a whole. As a whole, I would split the deduction between the two of you even though you could play hard and take the whole deduction yourself. I would say husband "paid" the interest on the loan he was clearly responsible for because you are married and are a single economic unit. I would say you were "responsible" for the loan you clearly paid because you were on title of the house and would lose it if the amount were not paid. I know there is some case law out there stating that but I could not find it with a quick search.

    Since this is going to be on a married filing separately return, I do not think you have to really paper around the eventual 1098 if you just split it. If you were to take the whole deduction you would need to see a tax person as he may want to add a statement to your return or even use the specific disclosure form explaining the situation and citing the case(s) that allow for the treatment.
    I kind of disagree with this response. There are two tests to determine whether or not a mortgage deduction can be claimed. The first test is that you must be legally obligated to pay the debt, and the second test is that you must have actually paid the debt.

    You don't meet the first test as you are not legally obligated to pay the debt, unless there is case law out there in MI saying otherwise...I do understand the point the previous poster made. Your husband doesn't meet the second test...again unless there is case law out there stating otherwise for MI.

    On top of that, when spouses file married filing separately they are required to either both itemize deductions or both claim the stand deduction. Therefore depending on the amount of mortgage interest involved, one of you could potentially get massively screwed if the other itemizes deductions and claims the mortgage interest...because then the other would have to itemize even if that means that they would be able to deduct significantly less than the standard deduction.

    You are in the greater risk "bucket"...because your name is not attached to the loan. You are the one who is going to get challenged by the IRS about a year or so after you file your tax return. You are the one who is going to have to fight the IRS for the right to claim the interest deduction.

    Therefore my recommendation is that you get consult with a tax professional

  5. #5
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    Sep 2013
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    Default Re: Who Can Claim Mortgage Interest

    Quote Quoting llworking
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    I kind of disagree with this response. There are two tests to determine whether or not a mortgage deduction can be claimed. The first test is that you must be legally obligated to pay the debt, and the second test is that you must have actually paid the debt.

    You don't meet the first test as you are not legally obligated to pay the debt, unless there is case law out there in MI saying otherwise...I do understand the point the previous poster made. Your husband doesn't meet the second test...again unless there is case law out there stating otherwise for MI.
    Saffet and Ana Uslu v. Commissioner
    74 T.C.M. 1376 (1997)
    T.C. Memo. 1997-551


    Respondent contends that petitioners may not deduct the subject mortgage interest payments because they had no legal obligation to Southern California Federal with respect to such mortgage. Respondent cites Golder v. Commissioner, supra, for the proposition that section 1.163-1(b), Income Tax Regs., does not create an exception to the rule of section 163(a) that interest is deductible only with respect to the indebtedness of the taxpayer. In other words, respondent contends that section 1.163-1(b), Income Tax Regs., applies only to situations in which the taxpayer has procured nonrecourse debt, and does not apply to a situation, such as in the instant case, where a person other than the taxpayer is legally obligated on a mortgage.
    Which is the situation for the OP here.
    In the instant case, petitioners' agreement with Haluk and Aysun coupled with petitioners' continued occupancy of the Alisal property and the performance by petitioners of all of the obligations under the Alisal property mortgage are sufficient to render petitioners' obligation to pay off the mortgage, an enforceable debt, to Haluk and Aysun for the amount of the mortgage at the interest rate specified in the mortgage. See Amundson v. Commissioner [Dec. 46,697(M)], T.C. Memo. 1990-337; Belden v. Commissioner [Dec. 50,802(M)], T.C. Memo. 1995-360. On this record, the Court finds that the mortgage payments made by petitioners to Southern California Federal with respect to the Alisal property were, in effect, payments of principal and interest to Haluk and Aysun. See id. In other words, the payments by petitioners constituted payments on an indebtedness of petitioners.

    To be sure, as required by section 1.163-1(b), Income Tax Regs., the taxpayer must be the "legal or equitable owner" of the property. Where the taxpayer has not established legal, equitable, or beneficial ownership of mortgaged property, this Court has disallowed the taxpayer a deduction for the mortgage interest. See Bonkowski v. Commissioner [Dec. 30,469(M)], T.C. Memo. 1970-340, affd. [72-1 USTC ¶ 9332] 458 F.2d 709 (7th Cir. 1972); Song v. Commissioner, supra.
    Legal title to the Alisal property was held in the names of Haluk and Aysun during 1992. Nevertheless, since the time of the purchase of 1379*1379 the Alisal property, petitioners have made each and every mortgage payment on the property and have paid all expenses for repairs, maintenance, and improvement in connection with such property from their own income. The real property taxes and insurance on the Alisal property were paid from an escrow account at Southern California Federal that was funded with a portion of petitioners' mortgage payments. Furthermore, petitioners and their children have been the sole occupants of the Alisal property since the time of its purchase in 1990.
    Concluding:
    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.
    Also see:
    Njenge v. COMMISSIONER OF INTERNAL REVENUE, 2008 TCM 84
    Trans v. Commissioner, 78 TCM 96
    Adams v. COMMISSIONER OF INTERNAL REVENUE, 2010 TCM 72

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