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Author: imawakenow Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121585  
Subject: Shacking up, filing separately, please help Date: 11/11/2003 12:07 PM
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Newbie question for tax savvy fools:

My boyfriend and I bought a house together in June. The downpayment, monthly payments, everything, is 50-50. Since we are not married and are filing separately, can we both claim half the interest so we get our fair share of the deductible? Should we investigate which one of us would have the greater benefit and that person claim the interest? (Then split it, of course.)

Thank you for any input you might have on this situation!
Ima
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Author: windyelliott Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67519 of 121585
Subject: Re: Shacking up, filing separately, please help Date: 11/11/2003 12:21 PM
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I believe the only person who can claim the tax deduction is the person on the title. If you are both on the title, then you may be able to take a portion of the interest, otherwise, I think the only way you can "share" in the savings is if he claims it and then gives you a portion of his refund.

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Author: imawakenow Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67520 of 121585
Subject: Re: Shacking up, filing separately, please help Date: 11/11/2003 12:28 PM
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Both of our names are on the title. Since my income is substantially higher, would it be best for him to claim the interest? Thanks again for your help.

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67521 of 121585
Subject: Re: Shacking up, filing separately, please help Date: 11/11/2003 1:16 PM
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imawakenow: "Newbie question for tax savvy fools:

My boyfriend and I bought a house together in June. The downpayment, monthly payments, everything, is 50-50. Since we are not married and are filing separately, can we both claim half the interest so we get our fair share of the deductible? Should we investigate which one of us would have the greater benefit and that person claim the interest? (Then split it, of course.)"


Phil Marti, do you have your standard unmarried persons buying real property together post bookmarked? You might see if TMFTaxes can have it added to the FAQ.

To OP: Phil will be along an axplain in detail with IRC citations and IRS manuals.

It would have been to ask this question five months ago, because you are trying to close the barn door after the cattle are gone.

Short answer, to take the deduction, one must be on title, indebted on the note, and actually make the payment.

Per your description, if you each paid 50% of each payment, you are each entitled to deduct 50% of total interest (if you alternate payments, then you would need to look at payments actually made [assuming an amortizing mortgage] because interest paid declines with each payment [assuming fixed rate mortgage or adjustable rate mortgage that has not adjusted up]). With some advance planning, it is possible to arrange who gets the deduction.

You also both need to deal with standard deduction "bcuket" and getting over its hurdle amount.

imawakenow: Both of our names are on the title. Since my income is substantially higher, would it be best for him to claim the interest? Thanks again for your help."

Now you really have me confused. Other things being equal, a deduction is more valuable to the person with the higher marginal tax rate (a/k/a in the higher tax bracket), which is almost always the person with the higher income.

Sit tight until one of the tax pro posts (probably pmarti). At the very least, you can rearrange your payment situation for next year.

Regards, JAFO


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Author: pmarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67523 of 121585
Subject: Re: Shacking up, filing separately, please help Date: 11/11/2003 1:25 PM
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Like JAFO said.

Since you're both on the title and responsible for the payments, whoever pays gets the deduction. It may very well be to your advantage for one of you to make all the deductible payments while the other uses the standard deduction and pays nondeductible expenses like food, utilities, maintenance, etc. You really just need to sit down and pound some numbers. One of the tax software programs would be useful for this.

The important thing is that you need to do this before the payments are made. Should IRS ever come to inquire, you'd want to be able to show that the person(s) claiming the deductions actually paid. If you decide that one person is going to claim them, pay them from separate funds. If you're going to split, you can pay from a joint account, but I'd make sure that the account is funded in the same percentages as the deductions.

Phil Marti
VITA Volunteer

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Author: wtam Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67526 of 121585
Subject: Re: Shacking up, filing separately, please help Date: 11/11/2003 6:08 PM
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I have been told, and my read of the relevant IRS publications also leads me to believe, that it does not matter who is actually on the title of the property with respect to deducting the mortgage interest. What matters is that the person taking the mortgage interest deduction is named on the mortgage loan note. The key is that the person taking the deduction must be legally liable for repayment of the loan, whether or not he actually has ownership of the property or not.

Is this correct? Or if ownership/title is required, could someone cite where this requirement is to be found. Please, no "i believes" but only an "I know" with a specific reference.

thank you.

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Author: pmarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67529 of 121585
Subject: Re: Shacking up, filing separately, please help Date: 11/11/2003 8:38 PM
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The key is that the person taking the deduction must be legally liable for repayment of the loan, whether or not he actually has ownership of the property or not.

This is true with respect to mortgage interest. If there was a situation in which someone was liable for the loan but not one of the titled owners that person would be able to deduct mortgage interest but would not be able to deduct property taxes even if he paid them.

In real life, I've never seen a situation in which someone was liable for the mortgage but wasn't on the title. That's not to say it couldn't happen, just like baby pigeons, I've never seen it.

Phil

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Author: wtam Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67530 of 121585
Subject: Re: Shacking up, filing separately, please help Date: 11/11/2003 10:08 PM
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"In real life, I've never seen a situation in which someone was liable for the mortgage but wasn't on the title. That's not to say it couldn't happen, just like baby pigeons, I've never seen it..."

now you have...in the case i know of, the adult son is supporting his parents and claims them as dependents on his return. however, since they also have a home equity balance outstanding, and the mortgage interest deduction is useless to them, the home equity loan was reissued in the names of the son and the parents, even though the parents are the only ones on the house title.

the son makes the interest payments on the loan, and does not worry about the title knowing that one day the house will pass to him in any case.

real life is stranger than fiction :)

i suppose the not being able to deduct the real property tax makes sense, since legally the tax liability is not the son's.

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Author: pmarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67535 of 121585
Subject: Re: Shacking up, filing separately, please help Date: 11/12/2003 4:32 AM
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in the case i know of, the adult son is supporting his parents and claims them as dependents on his return. however, since they also have a home equity balance outstanding, and the mortgage interest deduction is useless to them, the home equity loan was reissued in the names of the son and the parents, even though the parents are the only ones on the house title.

the son makes the interest payments on the loan, and does not worry about the title knowing that one day the house will pass to him in any case.


I think I answered this too quickly earlier. On reflection, I think the taxpayer must be an owner of the property, as well as liable for the debt, in order to deduct the interest.

Section 163(h) allows a deduction for mortgage interest if the mortgage is secured by a "qualified residence." A deduction is allowed for acquisition indebtedness or home equity loan indebtedness. Clearly if the taxpayer doesn't hold title we're not talking about acquisition indebtedness.

Nowhere does section 163 come right out and say that the taxpayer must own the property, but it does say that the taxpayer must use it as a residence. I've also looked at the regs, which don't offer any more help. However I can't find any sane way of reading the code or regs that doesn't assume the taxpayer owns the property. I've not looked at any case law.

Any thoughts, anyone?

Phil

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Author: wtam Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67538 of 121585
Subject: Re: Shacking up, filing separately, please help Date: 11/12/2003 9:47 AM
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interesting. in this case, home equity indebtedness seems to still apply, but i would have assumed the loan is still acquisition debt on the property, even if the taxpayer is not actual title holder. debt secured by property, for which the taxpayer is legally obligated. i don't really see why explicit ownership would be required.

also, when you say the property must be used as a residence, that is distinct from "primary residence", correct? a person may have a number of residences, but only one primary residence that would qualify for the capital gains exclusion after being an owner and living there for two years?

thanks again for your thoughts and insights.

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