By Donald Paris CPA MST CDFA
Interesting question that the Tax Court Summary Opinion 2016-33 dealt with in Jackson. The Court held that, where an unmarried couple who lived together in a residence that was owned and financed solely by the woman, the boyfriend could not deduct amounts he paid the woman as his share of the mortgage interest.
Now for some tax education. Internal Revenue Code (IRC) Section 163 allows a taxpayer a deduction (within certain limits) for payments of qualified mortgage interest. Everyone knows about this one. More specifically, Section 163 allows the interest paid as deductible where the mortgage is one in which he (or she as this case has it) is the legal or equitable owner, even though he is not directly liable on the bond or note secured by the mortgage. In determining whether a taxpayer has any of the benefits and burdens of ownership of the property, the Tax Court considered whether the taxpayer:
- Has a right to possess the property and to enjoy the use, rents or profits;
- Has a duty to maintain the property;
- Is responsible for insuring the property;
- Bears the property’s risk of loss;
- Is obligated to pay the property taxes, assessments or charges;
- Has the right to improve the property without the owner’s consent; and
- Has the right to obtain legal title at any time by paying the balance of the purchase price.
In Jackson, during 2011 and 2012 James Jackson lived with his girlfriend, Julie Furney, who purchased the residence in 2005. Ms. Furney had a mortgage on the property and was listed as the sole owner of the property as she was the sole person on the deed to the property. Technically, she was the only person responsible for the mortgage on the property. Mr. Jackson and Ms. Furney lived as “domestic partners” sharing the expenses of the residence. As such, Mr. Jackson claimed he transferred $1,000 in cash to Ms. Furney every month to make interest only payments on the mortgage.
The Tax Court held that Mr. Jackson did not qualify for an interest deduction. He did not establish himself as an owner of the property. The Court looked at Nevada law to help them with this decision. The Supreme Court of Nevada recognizes that unmarried adults may expressly or impliedly agree to hold property as though it were community property. The problem with our case is that Mr. Jackson did not provide any objective evidence that he paid the mortgage interest or that he was an equitable owner of the property. He did not produce any bank statements, receipts or other evidence that he actually transferred money to Ms. Furney to pay the mortgage or other expenses. Note to self – always have a record of a payment.
So, what have we learned from this case? Simple, (a) if you have an agreement on an item, put it in writing, (b) if you claim a deduction on your tax returns, have documentation/evidence to prove the amounts are accurate and lastly (c) only deduct items on your tax return you have a legal basis to deduct.