Mortgage Interest Question

[Anne_in_VA]

We have some relatives that are not married but live together, and have lived together for several years.  He bought a house and she pays half the mortgage as well as half of other bills.  Can they each deduct half of the mortgage interest on their tax return since they are each paying half?  Turbo Tax says yes but I can't find anything about it on the IRS site.

[taz157]

Whose name is on the mortgage?  If just him, then only him.  If both, then both.

[Anne_in_VA]

His name is on the mortgage.  Since he bought the house, he's always taken the deduction, but for some reason when they were doing their taxes this year Turbo Tax said they could split it.  Not sure why or how they posed the question in the software though.

Thanks!

[rangerj]

Look at the October of 2008 Journal of Accountancy article regarding "Equitable Ownership".  Also see Nair v. Commissioner, TC Summary Opinion 2007-116. The U.S. Treasury Regulations recognize "equitable ownership" at Reg. section 1.163-1(b).

[taxref]

Allow me to expand on some of the answers above.

The general rule is that to deduct mortgage interest and real estate taxes, a person must both make the payment and be legally obligated to do so.  The "legally obligated to do so" rule usually means the property must be in that person's name.

An exception exists in cases of beneficial (also called equitable) ownership.  If all rights to the property have passed to the taxpayer, the taxpayer can deduct the amounts the taxpayer paid, even if the property is in someone else's name.  

Beneficial ownership is not as rare as it would seem.  A common example is when a newly married couple tries to buy a house.  They might not be able to get a mortgage, or the interest rate might be very high for them.  So instead, Mom and Dad buy the house in Mom and Dad's name.  The kids make all the payments, can sell it whenever they want, do all the repairs, etc.  In that case, the kids can deduct the interest and taxes.  Beneficial ownership is also seen in a number of divorce/separation situations.

Needless to say, there should be a written agreement about this.  A host of problems can come up from an unverified beneficial ownership scenario.  The least of which is the IRS, as the burden of proof is on the taxpayer if the beneficial equity status is challenged.

As to the OP's original question, this would seem to be a case of beneficial ownership.  Consequently, the expenses are deductible by the parties based on what they actually paid.