In a summary opinion,
the Tax Court has concluded that a taxpayer could claim home mortgage interest
deductions for making payments on a mortgage even though it wasn't held in his
name, and even though he didn't hold legal title to the underlying property. An
oral agreement granting him an interest in the home in return for paying the
mortgage and property expenses, coupled by the fact that his name ultimately
was added to the legal title, established that he was an equitable owner of the
property.
Background. Under Code
Sec. 163, a taxpayer is generally allowed a deduction (within dollar limits)
for interest paid or accrued on qualified residence interest, which includes
interest paid on acquisition debt with respect to any qualifying residence of
the taxpayer. A taxpayer may deduct, as home mortgage interest, interest he
paid on a mortgage on real estate of which he is the legal or equitable owner,
even though he is not directly liable on the bond or note secured by the
mortgage. (Reg. § 1.163-1(b))
Courts consider
various factors in determining whether the benefits and burdens of ownership
have been transferred to a taxpayer. These factors include whether the
taxpayer:
. . . has a right to
possess the property and to enjoy the use, rents, or profits thereof;
. . . has a duty to
maintain the property;
. . . is responsible
for insuring the property;
. . . bears the
property's risk of loss;
. . . is obligated to
pay the property's taxes, assessments, or charges;
. . . has the right to
improve the property without the owner's consent; and
. . . has the right to
obtain legal title at any time by paying the balance of the purchase price.
It's well settled that
state law determines the nature of property rights, such as legal or equitable
ownership, while federal law determines the appropriate tax consequences of
those rights. Under California law, the owner of legal title to property is
presumed to be the owner of full beneficial title as well. This presumption may
be rebutted only by clear and convincing proof. One way of overcoming the
presumption is by showing that there exists an agreement or understanding
between the parties evidencing an intent contrary to that which is reflected in
the deed.
Facts. In 2008 Van
Phan moved into a house on a three-acre ranch in California to help his mother,
who was unable to care for the home. He lived at the property during 2010.
During this time his mother was in the process of divorcing his father, who
left the property before 2008 and did not live there at all in 2010.
As part of the divorce
settlement, Van Phan's mother agreed to pay his father in exchange for his
father's interest in the property, and to secure the needed funds, the mortgage
loan for the property was refinanced. Because of his financial situation, Van
Phan was not able to buy the property. But he did enter into an oral agreement
with his mother and his siblings that he would pay the mortgage loan and the
property taxes and that these payments would increase his equity interest in
the home.
During 2010, the legal
title to the home was held by Van Phan's mother, brother, and father, and the
mortgage on the home was not held in Van Phan's name. On his 2010 return, Van
Phan claimed a $35,880 deduction for home mortgage interest he had paid on the
mortgage loan.
Van Phan's sister and
sister-in-law refinanced the mortgage loan in 2011, and in 2013 his name was
added to the legal title to the property.
In 2013, IRS issued
Van Phan a notice of deficiency disallowing his claimed home mortgage interest
deduction and imposing the Code Sec. 6662(a) accuracy-related penalty.
Taxpayer victory. The
Tax Court found credible Van Phan's testimony 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. And, in fact, his name was added to
the title in 2013.
Van Phan resided at
the property in 2010, consistent with his right to possess and enjoy use of the
property. He also took a number of actions consistent with performing his
duties, responsibilities, and obligations under the agreement with his family.
He made the mortgage payments before, during, and after 2010. He testified
credibly that he made the property tax and insurance payments, paid the cable
bill, maintained the property, and made improvements to it. As a result of
these actions, Van Phan was granted the right to add his name to the legal
title to the property. Van Phan also bore a substantial risk of loss because he
stood to lose the funds spent to build his equitable interest.
The Tax Court concluded
that Van Phan provided clear and convincing evidence that he was an equitable
owner of the property in 2010. Thus he was able to take a mortgage interest
deduction for the 2010 tax year. If you would like more details
about these or any other aspect of the
law, please do not hesitate to call.
(651) 621-5777, (952) 583-9108, (612) 224-2476, (763)
269-5396
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