Interest Deduction - Unmarried Couple

[zeros]

Unmarried couple live together and have a mortgage where both are legally liable to pay. The man pays the full mortgage and the girlfriend pays 1/2 to the boyfriend. Can the man legally deduct the interest and real estate taxes and the girl file with standard deduction?

[Bees Knees]

The girlfriend can always claim the standard deduction. In my opinion, however, the boyfriend must reduce his deduction by the amount reimbursed.

TTB, page 4-13

Refund of interest. If a refund of interest is received in the same
year it was paid, reduce interest expense by the amount refunded.

If it is not a refund, what is it? A gift? Rent?

A gift can't have strings attached. Thus, the only two possibilities are it is either a refund of interest paid, or rent. Either way, the boyfriend can't get the benefit of a full deduction since the net result is he didn't pay the full amount.

[erchess]

Never thought I'd argue with Bees but

it is clearly not a refund of interest imho. It is her paying half of one of their common expenses. She can't REFUND anything that was not previously paid to her. Let's say that Brad stole Bees' lunch money and I give Bees his money back perhaps because I felt bad since I put Brad up to the theft. I'm not REFUNDING anything because there was no prior payment from Bees to me. Similarly if I decided to ask the couple to show me how much mortgage interest they paid so I could write them a check for that amount, my action would have no tax consequences for them. A person can only REFUND what was previously paid to THEM.

In this case both principal and interest on the mortgage are being paid. Furthermore there's probably no written agreement specifying what the money is for and if there is it should be shredded. There is not or need not be any written evidence that anyone besides the man paid any part of the mortgage so he should claim the entire amount and she should claim standard if that works out to be to their mutual best interest. They could of course split the interest if they wanted to. Note that her writing checks to him for an amount equal to half the mortgage payment each month proves nothing. If they agree that it was a gift or a repayment of expenses having no tax consequences no one can prove otherwise.

Consider the case of a married couple filing separately. They could decide on whose return what jointly paid expenses are deducted could they not? This would seem to me to be a parallel case.

[Burke]

Sorry, I agree with Bees on this one. Had a similar situation. Sort of. Couple could not sell house when they separated, as buyers could not qualify for mtge. So they worked out an agreement with the buyers for them to live in house and pay an amount to the sellers equivalent to the mtge, taxes, ins until they could qualify to buy outright. Wife wanted to claim all the int/tax on her MFS return and spouse take standard ded. Wouldn't do it. (Somehow the clients completely missed the fact that they had to claim the payments as income as well.)

[thomtax]

Consider the case of a married couple filing separately. They could decide on whose return what jointly paid expenses are deducted could they not? This would seem to me to be a parallel case.

Technically yes, but if I read your thoughts correctly - NO. Remember, MFS, if one files with itemized deductions, the other must follow, even if it is $0 - no standard deduction.

LT

[erchess]

Mfs

I certainly agree that in the case of MFS if one itemizes the standard deduction of the other is zero unless the other qualifies as HOH. However, I believe that the couple would be free to apportion their Sch A expenses between their two returns in any way they saw fit. What I'm arguing is that the couple in OP has the same flexibility PLUS the ability to have one itemize and the other take a normal standard deduction.

I'm not totally convinced I'm right but I have not been convinced I'm wrong either. The reason I care so much is that I just picked up as clients my first two unmarried couples. One had a child in 10 and one is expecting in May of 11. Neither has income sufficient to itemize. Before I file their returns I need to be absolutely sure I am getting everything right.

[MAMalody]

I have seen this a couple of times and decided that the parties were only able to deduct the portion that they actually paid. I would consider the girlfriend as paying her portion. In fact, I believe that is what the OP implied when it was stated she paid 1/2 to the payment to the boyfriend. If the IRS would allow you to deduct mortgage interest when you were not legally liable for it, such as parents buying for you in certain situations, why would this be significantly different? It would appear that the deductible being split would be a stronger position since there is an actual legal liability in place. I only see the boyfriend as a conduit and the substance of the transaction is that both, individually, paid a portion.

[zeros]

Groceries?

What if the girlfriend specified that her payment is for groceries, or other household expenses, not including the mortgage? Would this clear the way for him deducting the full amount of interest, taxes?

[appelman]

As i understand the law...

Where mortgaged property is held jointly, and joint owners are jointly liable for the mortgage, each owner is entitled to a deduction for the mortgage interest that (s)he pays out of his or her own funds. When there isn't joint liability, or when there is right to reimbursement, each tenant is entitled to deduct only his or her proportionate share of the interest.

The question of intent to reimburse may come up here. As a practical matter, if the 1098 shows only his name and social security number, he can probably get away with deducting the whole thing.

[Gary2]

The essential question isn't whether or not he can deduct the full amount, but what is the nature of the money she pays him. Is it a gift, shared expenses, or rent? We can probably rule out rent if she also is on the deed, unless there's some inequality in the ownership. If it's shared expenses, then which expenses are covered, and what proportion goes to the mortgage?

Usually people in this situation want to split the deduction and other expenses fairly. My stock advice here is to open a joint checking account, agree on how much each person will put into the account each month, and use that account for paying all household expenses. If they wish to have just one person take the mortgage deduction, then the simplest thing is to have that person pay the mortgage directly, deduct that amount from the monthly contribution into the joint account, but continue to us the joint account for all other shared expenses.