If you don’t know by now, I sleep about five or six hours a night. I go to bed at 10 o’clock, and wake up around 3:30 or 4:30 in the morning. During the hours between 4:30 and 6 o’clock, before I go to the gym, I spend my time updating myself on the Tax Code. This morning I ran across something very interesting. Qui Van Phan v. Commissioner, TC Summary Opinion 2015-1, is a Summary Opinion by the United States Tax Court. A Summary Opinion, is issued in an S case (small case). A Summary Opinion cannot be relied on as precedent, and the decision cannot be appealed. You can’t rely on it as precedent, but you can certainly refer to it when you are arguing the case, or applying the Tax Code. In this Summary Opinion, the Tax Court solved a question that a lot of taxpayers have. I have been asked this question countless times in my career. What happens, if you pay the mortgage interest of the house that you don’t own title to?
The Tax Court 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.
Just for some background, IRC § 163 states that:
Taxpayers generally allow deduction for interest paid or accrued unqualified residents interest, which includes interest paid on acquisition debt with respect to any qualifying residents of the taxpayer. A taxpayer may deduct his home mortgage interest, interest you paid on 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.
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 ensuring the property;
peers 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.
Here are the facts of the case:
In 2008, Van Phan moved into a house in the 3 acre ranch in California to help his mother, who is 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 siblings that he would pay the mortgage loan and the property taxes and these payments were increases equity interest in the home.
During 2010, the legal title to the home was held by Van Phan’s mother, brother, and father in the mortgage on the home was not held in Van Phan’s name. On his 2010 return, Van Phan claimed a $36,880 deduction for home mortgage interest he had paid on the mortgage loan.
Van Phan’s sister and sister-in-law refinance a mortgage loan in 2011, and then 2013 his name is added to the legal title of the property.
In 2013, the IRS issued Van Phan a Notice of Deficiency disallowing his claimed home mortgage interest deduction and imposing a penalty for accuracy.
What the tax were dead, was a found credible evidence in 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 you 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 interest before, during, and after 2010. His testimony was rated as credible that he made the property tax and insurance payments, pay the cable bill, maintain the property, and made improvements to it. As a result of the these actions, Van Phan was granted the right to add his name to the legal title of the property. Van Phan also bore a substantial risk of loss be assisted to lose the funds spent to build his equitable interest.
So everybody is happy. The Tax Court concluded that Van Phan provide a 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.
TAKE THAT IRS!