CP 2000 Notice

[S T]

Taxpayer received a CP 2000 notice for 2004, mortgage interest deduction(3 mortgage statements, 1 for main home, 1 for equity line and one for 2nd home) We have documentation for all mortgage interest taken. They can not match one mortgage interest statement that is for a home equity line of credit under $600, so apparently did not get reported to IRS, but we have a statement. Main mortgage no problem.

The other mortgage interest statement(2nd home 50/50) is issued in someone elses name. Taxpayer bought into a mountain cabin. Mortgage interest statement is issued to original owner 100% name and social security number. T/p is sharing 50/50 mortgage interest and property taxes as well as maintenance, insurance, etc. The property was not refinanced with both names showing on the loan.

Shouldn't be a problem, correct, can I just simply send copies of mortgage interest statements which equal all of the mortgage interest deductions on the tax return, along with explanation of the 50/50 property. Should I send along anything else, like agreements?

Thanks,

Sandy

[Black Bart]

Legally liable?

The property was not refinanced with both names showing on the loan.

can I just simply send copies of mortgage interest statements which equal all of the mortgage interest deductions on the tax return, along with explanation of the 50/50 property. Should I send along anything else, like agreements?

I've done that (sent copies which equal...explain...etc,) and it worked just fine, but in my case there was only one taxpayer involved and the IRS letter came about because there were so many accounts and such complex circumstances that they just couldn't figure out what had been done.

Only thing, in your case in which both names are not on the loan; isn't there something in the rules that says the t/p must not only have paid the debt, but he/she must have also been legally liable for it? Is your client maybe a co-signer on the note or something that's binding?

I think they'd understand your explanation, but I'm not so sure they'd allow the deduction for your client, even if you sent proof of payment and an agreement from the other person.

[jimmcg]

Whose name (or names) are on the deed and what form of title? (joint tennancy, etc.),,,,Also whose name (or names) are on the mortgage and the note.....This would shed some light on who was legally laible for payment.

[jainen]

another example

This is another example of the need to see what the paperwork actually says. If he "bought into" the cabin with a properly structured contract, then the seller would in effect be carrying a loan for the partial interest. That's not likely, however, because if he recorded such a deed then the original lender would invoke the due on sale clause and force a refinance.

Since all we have are wild guesses (which are my favorite viewpoints anyway), I'd say that not only is your client not on the loan, he's not even on recorded title!

[S T]

Deed

The deed originally was party #1 h/w, when party#2 bought 50%, the deed was changed to party #1 h/w and party #2 h/w tenants in common.

The mortgage checks for party #2 are made payable to party #1, then party #1 pays the entire mortgage payment.

Wouldn't party #2 still be financially liable for 50% of the debt even though the loan was not rewritten with both parties on the loan. The mortgage company holds a lien on the property?

Sandy

[jainen]

Read the papers

The buyer is not liable to the mortgage company, that's for sure. What does the contract say? Did the seller record a lien against the buyer? If the buyer's arrangement to pay interest is not secured by his share of the property then it is not qualified mortgage interest. Read the papers.

[Black Bart]

Nothing ventured, nothing...

Sandy,

You may not be technically entitled to the deduction, but that doesn't mean you absolutely cannot get it.

Your problem isn't going to be decided or resolved by academic scholars or those of us parsing the fine points here on the board. It's going to be decided by an ordinary IRS clerk. If you're lucky, what may be important to that clerk is whether or not your client only paid that interest. Sometimes they: don't know all that much about the regs (haven't the slightest notion that liability is relevant) -- hate to ask somebody else and reveal their lack of knowledge -- only use common sense (the client was out the money) as a normal person would to decide such things -- have excessively referred issues to a "technical specialist" and don't want to do it again -- want to impress the supervisor by handling cases without tech assistance -- had a good day yesterday -- are feeling generous today.

Any and all of those or other reasons may tip things in your client's favor. I had a similar problem decided in my favor by an IRS clerk -- my client transferred some interest from a relative and really had no standing to do it, but we had a common sense justification and it flew.

So...it's worth a try. Get the other person to sign an agreement, explain it, round up the 1098s and whatever's pertinent, mail the stuff. Prep the client: "You didn't handle it right. It's a long shot and there are no guarantees, but I'll try to bail you out." In any case it'll prompt the client to get it fixed for next year. If it doesn't work, IRS will send you back a very nice "no" letter and you won't be any worse off than you are now. If it does work, you're a hero.

[DaveO]

If your client pays the interest to the other owner list the interest as "Not reported on 1098" with the other owners name address and social. The other owner should report it as interest income and take the full amount as an itemized deduction.

[Armando Beaujolais]

C'mon you guys!

"You might be able to get away with it if you file it right" is never a good answer in my opinion.

The loan must be secured by the property for the interest to be deductible. Period. End of story.

If the loan is secured by the property, it's a done deal. You don't have to jump through any hoops or schmooze any IRS representatives. Just list the recipient's name and SS, and attach a copy of the agreement.

"Let's go in on a cabin, 50/50." Sounds great. Everybody makes payments for a while, everybody trusts everybody, everybody's happy, the fishing's good, and the sky's always blue. Why do I get a sinking feeling about Guy #2 going to Guy #1 and saying "I need you to sign a document that says I own 50% of this place."

Assuming Guy #1 says yes, he's also going to say "I need you to sign a document that you lose the cabin if you don't pay the loan."

There are too many things that could go wrong, and why a handshake won't work in this situation.

[Snagglefoof]

Nominee

Wouldn't the nominee mentality prevail in this situation? If this were interest INCOME, the solution would be easily solved by a nominee document...

Sorry about the name folks. I'm in an endless loop trying to get the message board to recognize that sometimes I log on to a different computer.

Regards, Snaggletooth

[Black Bart]

Sometimes it's a good answer.

C'mon you guys!

"You might be able to get away with it if you file it right" is never a good answer in my opinion.

The loan must be secured by the property for the interest to be deductible. Period. End of story.

If the loan is secured by the property, it's a done deal. You don't have to jump through any hoops or schmooze any IRS representatives.

IRS is out for the money -- I think that's obvious. It's no accident that they lose a tax case in which it's patently clear that they're wrong, but still refuse to follow the decision of the Tax Court. Why? Because, of course, there's a lot of money to be made with that particular issue and they realize that the majority of taxpayers can't spare the time, money, and effort to go to court -- they have to just pay up. Ever had an auditor try to disallow 100% of your no-records client's mileage when it's blatantly plain that (other than being "beamed up") they must have driven some miles for business? Remember what the NYEA told me a while back about the no-evidence Cohan rule? They did away with the travel portion of it -- too effective for the T/P. There are many examples of that type of thing, but I'm sure you see the point and will counter with "Two wrongs don't make a right." True enough, but we're not always dealing with choirboys or your pastor. Many times we're dealing with sharks who will tell you to drop dead in a New York minute, if it's to their advantage.

My point is, I think I'm justified in doing my job and not theirs. If they want to hire dopes (and they do) and make me deal with them, then I don't feel obligated to assist them. I'm not schmoozing or using tortured logic on them. I'm sending them papers to explain my position. If they don't understand it correctly, then I'm willing to let the misconception stand and I can live with that. If a bank teller gives me $100 too much change in the deposit bag, I'll take it back to him/her. But they're not trying to beat me out of anything.

If you want to look at it strictly from a viewpoint of right's right, what about this: The guy was out the money and paid the interest. That's right, isn't it? Now why -- in the name of all that's just and true -- should he not be allowed to deduct it?

[jainen]

Suppose the cabin burns down

Suppose the cabin burns down and the owners abandon the property. Suppose the bank forecloses as a recourse loan--it sells the land for a fraction of what is due and demands the balance from the original borrower. Can the bank also force the new buyers to pony up their share? If the answer would be no, then on what theory can the new buyers deduct mortgage interest?

[Unregistered]

Black Bart
Perhaps he can deduct his share of the interest. The regulations say you must be the legal or EQUITABLE owner of the property. This is not an easy issue to decide but the facts might show the taxpayer is an equitable owner of 50% of the cabin. Go to the Tax Court website & search for Uslu TC Memo 19997-551. Good discussion & a win for the taxpayer on equitable ownership.

New York Enrolled Agent

[Black Bart]

Thanks for the assist, New York

That Pacific Pundit is always after me, ever since he accused me of bein' a member of the Know-Nothing Party (first guy that says "If the shoe fits..." is gettin' reported to the mod for slander).

jc - suppose, propose, schmoze...blah, blah, blah. What if the sun doesn't come up tomorrow? It that a reason to deny my deserved deduction? The theory is that he takes it because he paid it and shouldn't be denied it because the bank may foreclose or Kim II may send over a nuke over tomorrow morning or gas goes to five bucks (dadgum surfin' showoff!).

GET EQUITABLE NOW!!!

[jainen]

liable for the mortgage

Oh, I'm quite sure the paperwork will say he owns the property. My question is whether it will say he is liable for the mortgage.