Tax law has an exception for unconventional “homeowners”. If you are able to “itemize” your deductions, you can deduct the mortgage interest payments even when the deed to the house and the mortgage are in someone else’s name.
Here's an example of deducting mortgage interest in this situation
Sue could not personally qualify for a home loan. Her parents stepped in to help. They bought the house, from an unrelated seller, and signed the mortgage.
Sue lives in the home and pays all the expenses of the property, including the property taxes and the mortgage. Using a little-known tax rule, Sue deducts the mortgage interest payments she makes on her individual income tax return, Schedule A, Itemized Deductions.
What is even more interesting is that Sue found out about this little-known rule after she had been making payments for a few years. Once she learned the rule, Sue amended three years of tax returns, claiming about $18,000 per year in deductions, and received a sizable tax refund.
If you are in a similar situation, you could be eligible for this tax deduction as well. You simply need to prove that you are the “equitable owner” of the property, as you can deduct the interest as long as you are either the legal or equitable owner of the property that secures the mortgage.
“Legal” title and “equitable” title are two different things. You just need one or the other to qualify for the interest deduction.
Legal title
This simply means legal ownership according to the real estate laws of your state. In general, legal title re-quires a deed of ownership that is properly recorded according to the laws of your state.
Equitable title
Under this doctrine, you prove that even though you do not have legal title, you bear the benefits and burdens of the property and are thus the true owner under the law for certain purposes.
When a court considers an equitable ownership claim, the judge looks at all the facts and circumstances of the situation. The factors the courts consider are:
- right to possess the property and enjoy its use, rents, or profits;
- duty to maintain the property;
- responsibility for insuring the property;
- risk of loss on the property;
- obligation to pay the property’s taxes, assessments, or charges;
- right to improve the property without the legal owner’s consent; and
- right to get legal title at any time by paying the balance of the purchase price.
If audited, you do not have to prove every single element in the list, but you want to show as many as possible. The more elements you have on your side, the stronger your case will be.
This can get tricky and a bit complicated, so if you have any questions about deducting mortgage interest in this scenario, just reach out to me or any of my Tax Problem Solver Team, and we can help you sort things out.
And, of course, if you have tax issues of any kind, don't hesitate to contact me or my team by one of the methods below in the blue box or email me at Larry@TaxProblemSolver.com and we can review your specific issues and solve them. You can also click here to book a free consultation.
Would You Like to Find Out What Your
Next Best Steps Should Be?
Choose one of the 3 FREE contact methods that is easiest for you.
Schedule a Call with Us
Click the calendar button below to view our appointment calendar, and choose a day & time, and we’ll call you then.
We look forward to your free consult!
Call Us Now
Click the phone button below to either "click to call" or direct dial a number to speak with us right now.
We look forward to speaking with you!
9-Secrets You Need to Know
When the IRS is after you, you need to be informed. What you say to the IRS can be used against you.
Get My 9 Secrets email series now. I'll also add you to my newsletter.
