The Mortgage Interest Deduction: Who Gets to Keep it?

Last episode, we compared 15 and 30-year mortgages to see which is best for your financial security. Today’s topic is who gets to take the mortgage interest deduction.

Amy from Minnesota called in with this question:

Hi Money Girl. I have a complex question that I think is becoming relevant considering that more and more couples today are not marrying and are choosing to buy a house and cohabitate without being married. We purchased a house and the loan had to go under my name because of my credit, but I was adamant at the time that they also put my partner’s name on the title because it’s worthwhile for him to claim any interest, whereas I have almost no income so it doesn’t help me to claim interest. So what I’m wondering is how do we go about or can we even go about getting him able to claim the interest deduction when his name appears only on the title and not on the loan paperwork (the mortgage paperwork).

Thanks for that great question, Amy! The topic is a really interesting one.

Who Qualifies for a Mortgage Interest Deduction?

OK, so who does get to take the mortgage interest deduction? Is it the borrowers on the loan? Is it the owners on title? Is it the person or persons actually making the mortgage payments? Who gets it?

In Publication 936, the IRS states that you can deduct mortgage interest if you itemize deductions on Schedule A and are “legally liable” for the loan. The IRS also says that you cannot deduct payments you make for someone else if you are not legally liable to make them. In addition, the IRS states that there must be a true debtor-creditor relationship between you and the lender. 

So, according to the IRS, it sounds as if you’d actually need to be on the loan to deduct the mortgage interest, but is that really the case?

Let’s see if Legal Lad can help shed some light on this topic.

Legal Lad here.  It is not required in every case for you to have a true debtor-creditor relationship with your lender to take the mortgage interest deduction. Title 26 Code of Federal Regulations section 1.163-1(b) provides, quote “interest paid by the taxpayer on a mortgage upon real estate of which he is the legal or equitable owner, even though the taxpayer is not directly liable upon the bond or note secured by such mortgage, may be deducted as interest on his indebtedness.”

In English, it means that you may deduct the mortgage interest you paid so long as you are an owner of the property, even if you are not specifically named on the loan.

Thanks, Legal Lad!

How to Deduct Mortgage Interest

So Title 26, which is the law, is clear: You may deduct the mortgage interest if you itemize deductions, even if you are not specifically named on the loan. And, generally speaking, when there’s a discrepancy between the law and a government agency’s interpretation of it, the language of the law prevails.

It’s always important to consult your own tax advisor whose opinion may differ from ours, but many seasoned tax pros typically will allocate the mortgage interest deduction between co-owning domestic partners based on the mortgage interest they actually paid, even if only one of them is named on the loan or mortgage interest statement.

And here are a few important points:

First, you may only deduct the mortgage interest you actually paid. So, in Amy’s case, if she’s paying half the mortgage and her significant other is paying the other half, they may each deduct only their half of the mortgage interest if they itemize deductions on Schedule A.

Second, if you own both a primary and a second home, you may deduct the mortgage interest you actually paid for both homes if you itemize on Schedule A.

Lastly, if you share the mortgage interest deduction with another person, but you are not named on Form 1098 (which is the form the lender sends you showing the mortgage interest that was paid during the year), you’ll want to create and attach a short and simple statement to your Schedule A that says how much of the interest you each paid and gives the name and social security number of the person who received the 1098.

If you want to learn more, see the end of the transcript. There, you’ll find links to IRS Publication 936, Title 26, and TaxAlmanac.org, where tax pros discuss this issue and many others in the online forums.

As always, everyone’s situation is different, so it’s a good idea to consult a tax or financial advisor.

Administrative

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Money Girl is part of the Quick and Dirty Tips network. Check out the Modern Manners Guy podcast. This week, he’s talking about interviewing etiquette. Thanks for listening!

Related Links:
·    IRS Publication 936, “Home Mortgage Interest Deduction”.
·    26 C.F.R. § 1.163-1(b).
·    Interesting case law:  Jordan vs. The Department of the Treasury
·    TaxAlmanac.org