Equitable Owner

[JohnH]

Parents purchase a home for their son & daughter to live in. Parent's names are on the deed and the loan is in their name only. Son & daughter provide the down payment, occupy the home, and pay all payments on the mortgage, plus all expenses of upkeep on the home. There is a written agreement that the son & daughter will get the deed when the home is paid off. All in all, I think the son & daughter are "equitable owners" if I read it correctly.

Naturally, the 1098 is issued to the parents. So how is the mortgage interest deduction handled? Do the son & daughter report the interest on Line 11 and the parents do nothing? Or is there another way this should be handled?

[OtisMozzetti]

Parents purchase a home for their son & daughter to live in. Parent's names are on the deed and the loan is in their name only. Son & daughter provide the down payment, occupy the home, and pay all payments on the mortgage, plus all expenses of upkeep on the home. There is a written agreement that the son & daughter will get the deed when the home is paid off. All in all, I think the son & daughter are "equitable owners" if I read it correctly.

Naturally, the 1098 is issued to the parents. So how is the mortgage interest deduction handled? Do the son & daughter report the interest on Line 11 and the parents do nothing? Or is there another way this should be handled?

Son and daughter, the equitable owners, report the mortgage interest as "interest not on a 1098" and provide explanation both at the time of filing and quite possibly later to the IRS. The U.S. Tax Court decision which decided in favor of equitable owners is Uslu, which can be found via a search at www.ustaxcourt.gov.

[FEDUKE404]

Check the agreement?

This is all foreign territory to me - I've always followed the path of "no ownership - no deduction."

The concept of (possible) equitable ownership is the issue here.

This is an interesting article:

http://www.aicpa.org/Publications/TaxAdviser/2012/January/Pages/TPP_Jan12_story-01.aspx

Important excerpt: "Taxpayers considering alternative financing for which someone else is the legal obligor should be careful to structure a written, enforceable agreement that clearly identifies them as the equitable owner of the property and assigns to them the corresponding burdens and benefits."

There also appears to be an issue that the non-owner is, in reality, paying the owner (and can deduct the payments) but there may be an issue of income to the actual owner for those payments??

This area is otherwise way out of my pay grade.......bring on the lawyers!

Good luck!

FE

[Black Bart]

Have to say, John that

Parents purchase a home for their son & daughter to live in. Parent's names are on the deed and the loan is in their name only. Son & daughter provide the down payment, occupy the home, and pay all payments on the mortgage, plus all expenses of upkeep on the home. There is a written agreement that the son & daughter will get the deed when the home is paid off. All in all, I think the son & daughter are "equitable owners" if I read it correctly.

Naturally, the 1098 is issued to the parents. So how is the mortgage interest deduction handled? Do the son & daughter report the interest on Line 11 and the parents do nothing? Or is there another way this should be handled?

you're always coming up with good, real-life questions.

Due to the proliferation of financially lightweight kids these days (they're comin' in the windows), my clients have asked this question several times before and until now I've always followed FE's dictum (no ownership-no deduction). But now, as he says, the link he posted is interesting indeed.

Next question though; is IRS following the 1997 Uslu case which was denied in the two previous situations (Loria/Song) or fighting it from trench to trench? Does it have to be stronger that a "Memo" before they go along peaceably?

[OtisMozzetti]

This is all foreign territory to me - I've always followed the path of "no ownership - no deduction."

The concept of (possible) equitable ownership is the issue here.

This is an interesting article:

http://www.aicpa.org/Publications/TaxAdviser/2012/January/Pages/TPP_Jan12_story-01.aspx

Important excerpt: "Taxpayers considering alternative financing for which someone else is the legal obligor should be careful to structure a written, enforceable agreement that clearly identifies them as the equitable owner of the property and assigns to them the corresponding burdens and benefits."

There also appears to be an issue that the non-owner is, in reality, paying the owner (and can deduct the payments) but there may be an issue of income to the actual owner for those payments??

This area is otherwise way out of my pay grade.......bring on the lawyers!

Good luck!

FE

One of my clients, who really is an equitable owner, actually is a lawyer herself. The filing ran up against the IRS document and SSN match even though the mortgage shows her name and that of the nominal owners (her parents). What this required was two rounds of letters and phone calls with the IRS, and then the mortgage interest deduction was allowed.

Some others have troubled me enough that I have refused to file with the deduction. There the story has been "He told us we can live in the house [which he continues to own] so long as we write the checks [or give him the money] for the mortgage payments and the property tax."

[New York Enrolled Agent]

Next question though; is IRS following the 1997 Uslu case which was denied in the two previous situations (Loria/Song) or fighting it from trench to trench? Does it have to be stronger that a "Memo" before they go along peaceably?

I seriously doubt you will ever see a regular TC decision on this. All of these cases are "facts and circumstances". The IRS (Treasury) actually wrote the regulations that permit equitable ownership. Thus, there would be no "following" or "not following" Uslu. The facts of the case will make the call - Did the taxpayer assume the benefits & burdens of ownership?

You might want to read two TCS cases. TCS 2011-83 - the taxpayer lost. TCS 2012-17 - the taxpayer won. What was the difference? - the facts and circumstances.

A snip from the 2012 case:
Acquisition indebtedness is any indebtedness secured by the qualified residence of the taxpayer and incurred in acquiring, constructing, or substantially improving the qualified residence. See sec. 163(h)(3)(B). The indebtedness generally must be an obligation of the taxpayer and not an obligation of another. See Golder v. Commissioner, 604 F.2d 34, 35 (9th Cir. 1979), aff'g T.C. Memo. 1976-150. Section 1.163-1(b), Income Tax Regs., however, provides that even if a taxpayer is not directly liable on a mortgage, the taxpayer may nevertheless deduct the mortgage interest paid if he or she is the legal or equitable owner of the property subject to the mortgage.

Petitioner acquired a partial legal interest in the property on December 3, 2007. In order to be entitled to a deduction for mortgage interest payments made before that date, petitioner must show that he had an equitable ownership interest in the property at the time those payments were made.

In determining whether the benefits and burdens of ownership have been transferred to a taxpayer, this Court has often considered whether the taxpayer: (1) has a right to possess the property and to enjoy the use, rents, or profits thereof; (2) has a duty to maintain the property; (3) is responsible for insuring the property; (4) bears the property's risk of loss; (5) is obligated to pay the property's taxes, assessments, or charges; (6) has the right to improve the property without the owner's consent; and (7) has the right to obtain legal title at any time by paying the balance of the purchase price. Blanche v. Commissioner, T.C. Memo. 2001-63, aff'd, 33 Fed. Appx. 704 (5th Cir. 2002).

[JohnH]

Just to follow up, this is a real-life situation (not a test question, etc). I think the existence of the written agreement between the parents and the son (& his wife) are a good start in establishing equitable ownership. The written agreement follows the terms laid out in the Blanche vs Commissioner case, for the most part.

The parents never made a payment on the loan. As soon as the loan was closed, they set up a dedicated bank account which they co-own with the son. All payments on the loan (PITI) are drafted from this account and all deposits to the account are drafted from the son's paychecks directly into the bank account.

As a side issue, this was a nice way for the son to budget the payments and for the parents to have some assurance that the loan is being paid promptly. Instead of trying to budget for a monthly payment, the son just sees 1/26th of the annual payment total deducted from his paycheck each pay period. This also gives the parents the benefit of knowing that the payments are being made in a timely manner, plus they have online access to the account if they wish to monitor it for any reason

Obviously it would better if the son just borrowed the money & bought the house. But equally obviously, that isn't possible right now. In the wake of events since Sept 2008, I'm thinking it's likey we may see more situations like this as people change jobs, move, their kids have kids, they work through foreclosures, recover from job losses, etc. Thanks for everyone for the comments and the cites. Maybe the title to this thread will serve as a good way to search for the discussion if anyone has this type of client situation arise in the future.