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We have a house under the 3 of us- me, my wife and her brother. I was wondering if we can use all of this year's mortgage interest just for ourselves when we file taxes and do deductions. The reason being his standard deduction would be about the same then with half the mortagage deductible. How does that work, do you have to split it or can one person use all the mortgage interest as deductible?
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We have a house under the 3 of us- me, my wife and her brother. I was wondering if we can use all of this year's mortgage interest just for ourselves when we file taxes and do deductions.

Whoever is liable for and pays the interest gets the deduction. If you've divided the payments three ways, you and your wife can only deduct 2/3 of it.

For planning, you might want to rearrange the payment of things so that you and your wife make the mortgage and property tax payments while your b-i-l pays such things as water, sewer, trash, utilities, etc. which aren't deductible. You need to make such arrangements before you make the payments, not when you're doing your tax returns.

Phil Marti
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Well for the last year, I believe her brother has given us a check every month for part of mortgage and bills. But when we pay mortgage, it comes out of our account. So does that mean we are only entitled to the deductions?? Is it against the law to use the interest if you didn't actually pay for it but your name is on the title? I got the 1099 for the mortgage interest and I don't believe seeing any records of who paid what during every month. Hope I made sense.
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I believe her brother has given us a check every month for part of mortgage and bills. But when we pay mortgage, it comes out of our account. So does that mean we are only entitled to the deductions?? Is it against the law to use the interest if you didn't actually pay for it but your name is on the title? I got the 1099 for the mortgage interest and I don't believe seeing any records of who paid what during every month.

I take a very conservative approach on these things, considering the following:

1. Who is responsible for the payments (all three of you)
2. Who paid the interest (unclear in this case)

Whose name and SSN appears on the 1098 is irrelevant to determining who gets the deduction.

To me your intent matters, and it seems to me that your intent was that you shared all expenses with your b-i-l. (I'm assuming here that you split the expenses three ways.) Thus, you and your wife would be entitled to 2/3 of the deductible expenses.

There's nothing in this scenario that would prevent your setting things up differently going forward.

Phil
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Thanks for the reply Phil. I think what I am trying to do is get the best tax deduction for us three. Whether it be my BIL getting the full mortgage int deduction or my wife and I getting, I wanted to know if that is allowed or not within IRS rules. You guys try and to tell me what my intent is or whatever but that doesn't matter, we're all family and we are just trying to work out the best scenario (within the law). So I guess my question to begin with was.

Is it legal or not for one person to take the full deduction although others have helped pay the mortgage? (keeping in mind most or all payments were taken out of the first persons account?)
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Is it legal or not for one person to take the full deduction although others have helped pay the mortgage? (keeping in mind most or all payments were taken out of the first persons account?)

Sorry I wasn't clearer. No, it's not legal. What would be legal, going forward, would be for you to plan for the tax deduction and make sure that the person who's going to deduct is the person who pays.

Phil
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<You guys try and to tell me what my intent is or whatever but that doesn't matter, we're all family>


Sometimes being "all family" is what causes the problem in the first place.<grin>


Phil is right that with a little bit of planning, you can easily arrange to cover all bases going forward. The particular situation you describe is a good illustration of why many people avoid such transactions like the plague. It is ripe for potential abuse if obligations and responsibilities are not clearly spelled out in writing ahead of time.

I have read so many horror stories over the years of people getting screwed by family members. When one party stops pulling their weight they often pull out the "family" card again. Instead of it being a business transaction it becomes a family issue. Even when there are no bad feelings at all, the normal things that can happen to anyone are a possibility: loss of job, the need to sell at a bad time, job relocation, medical problems, parents, children, other family members, etc. What happens if your home needs a major repair or improvement and one of the parties says "I can't afford it?". How will you handle this or any of the other issues that may pop up along the way?

In your case, you should figure out who stands to benefit most from the deductions and structure the monthly expenses accordingly. Ultimately, if everything else is kosher, you should not be raising any red flags for audits. However, it important to remember that it is always up to the taxpayer to be able to provide the supporting documentation when asked for it. Maintaining good records is not always the easiest of tasks. There are usually many questions that appear here around this time of year from those who are trying to piece together undocumented taxable events. Good luck with your choices.


BRG
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This situation effects my GF and myself this year, and this answer doesn't make sense to me.

You're saying, that since we aren't married, and file seperatly,and own a house jointly, that even though we both agree that the person who receives the best tax benefit from using the mortgage deduction be the one to take it, under the law we must split the deduction?!?!? Thats nuts.

In our case, that would mean that most likely, neither one of us will be able to itemize! What does the government care, and who in the hell are they to dicatate anyway, who takes a LEGAL deduction and who doesn't? I'd bet that if both of us were to "forget" to take the deduction they wouldn't come running after us to tell us that we forgot!

The way this works out, both of us will lose the tax benefits of owning a house. So something here doesn't seem to make sense to me. Oh Wait! Its the government screwing me again...Makes sense now

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ShadoRydr, that's what I was thinking too. A household of people should be able to decide on who gets to use the mortgage deduction cause if you split it, it'll most likely be useless. I looked into it a little bit more and found this page.

http://www.irs.gov/faqs/page/0,,id%3D15792,00.html

I think it's the 2nd or 3rd question down that describes our situation. It's pretty general still but there is a link to a pdf file that describes it more. I'm going to look into it tonight.
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Hi ShadoRydr:

This situation effects my GF and myself this year, and this answer doesn't make sense to me.

You're saying, that since we aren't married, and file seperatly,and own a house jointly, that even though we both agree that the person who receives the best tax benefit from using the mortgage deduction be the one to take it, under the law we must split the deduction?!?!? Thats nuts.


You think it's nuts that you can't just decide for yourselves who gets a deduction? If we could all do that with tax deductions none of us would pay much in taxes, now would we?

The answer that was actually given was that if you split the mortgage and tax payments (as in each of you "deposited" say $500 to make a $1000 PIT payment) then you would need to split the interest and tax deductions. Provided you were each liable for the payments.

As several before me have already said there IS a way to get what you want but you can't just decide after the fact that one particular person gets a deduction since for 2002 the "paper trail" is already established. You need to make sure the (deductible) payments are paid by the person who will get the most benefit from the deduction. Then the other person can pay for non-deductible items (i.e. utilities, food, insurance etc.) Then there is no question with who paid for it and therefore who gets the deduction.

As with all things tax.......planning, planning, planning!!

It's still early enough in 2003 to make it work.

HTH
cjbb
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Johanne,

I found that yesterday myself. I also asked the Controller here where I work (she worked for HR block and had a tax prep service of her own up until 2 years ago) about this. She said that there should be no problem in having one person or the other take the deduction. She did say that if the 1098 came in both names, to make things clean, a form should be attached to the return listing the other parties name, address and SS number to indicate that the mortgage, and liability for it, is joint. She said the form is especially necessary, when only one of us receives a 1098 and the deduction is being split.

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It still makes no sense...and there is no way to track this.

We use a joint account. The mortage is paid out of this. Who's to say that it isn't my portion of whats put in the joint account that pays the mortgage, and her portion that pays the other bills? And what if we decide to switch it around next year, still using the joint account? See the conundrum? If you decide not to get married (for our reason to know alone) but decide you want to handle finaces for the most part as if you are, there is no way around being forced to split the deduction. Yet, I don't see any way the government can tell me who's money out of a joint account is paying for what.

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Hi ShadoRyder:

It still makes no sense...and there is no way to track this.

We use a joint account. The mortage is paid out of this. Who's to say that it isn't my portion of whats put in the joint account that pays the mortgage, and her portion that pays the other bills? And what if we decide to switch it around next year, still using the joint account? See the conundrum? If you decide not to get married (for our reason to know alone) but decide you want to handle finaces for the most part as if you are, there is no way around being forced to split the deduction. Yet, I don't see any way the government can tell me who's money out of a joint account is paying for what.


How could it not make sense? The person who is liable for AND PAYS the interest and taxes gets to take the deduction!!!!

The conundrum is that as far as the IRS is concerned if you pay from a JOINT account then both of you actually paid the interest and taxes and therefore you will have to SPLIT the deduction. That is how it is tracked. Unless you are proactive in paying as posted previously.

About the being married part. You want the tax benefits of being married without the penalties. You failed to mention whether the one who doesn't get to itemize will forfeit the $4700 single standard deduction??? I thought not!! AHH the best of both worlds. Unlike anything a married couple can get away with.

cjbb



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No, No,


I'm really not trying to argue with you per se, perhaps just the position of our govenment (which probably explains why I am a libertarian).

I also just got of the phone with an IRS technical agent during my lunch. According to him, the person who's social security number is on the 1098 (and there will be only one) can take the entire deduction if its decided to do it that way. If you decide to split the deduction, the person who's SS number isn't on the 1098, will need to reference the return of the persons who's number is, in order to substantiate the deduction they are claiming. Since there is only 1 social security number to cross reference, only that persons return is subject to scrutiny. If they decide not to take the deduction, that is up to them.



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Hi ShadoRydr:

I'm really not trying to argue with you per se, perhaps just the position of our govenment

Nor am I trying to argue with you. I am just stating the way the law is written whether or not it makes sense to you. It does make some sense in that (for example) say my brother does not have enough deductions to itemize but makes sizable charitable contributions. I decide that even though I did not PAY for those contributions it isn't fair that they are "wasted" so I will take them. We have the same last name and I even have the letter that says Dear Mr. X thank you for your contribution so I have documentation!! Will I get caught? Maybe not. Is it legal? NO

I also just got of the phone with an IRS technical agent during my lunch. According to him, the person who's social security number is on the 1098 (and there will be only one) can take the entire deduction if its decided to do it that way. If you decide to split the deduction, the person who's SS number isn't on the 1098, will need to reference the return of the persons who's number is, in order to substantiate the deduction they are claiming. Since there is only 1 social security number to cross reference, only that persons return is subject to scrutiny. If they decide not to take the deduction, that is up to them.

If your question is "will I get caught if my SSN is on the 1098 and I take the full deduction even though I cannot prove that I (alone) made all of the interest and tax payments?" then your arguments are correct and the likelihood of that being the trigger for an audit or that you will be caught as in the above example is extremely low.

But, if the question is as the Original Poster asked "is it legal?" then the answer as Phil stated previously is "NO". And if you were to be subject to a full random audit and could not prove you made the payments (in all likelihood) the deduction would be split between those that did the actual paying.

Deciding not to take a deduction you are entitled to is the taxpayers business, but deciding to take a deduction you are not entitled to is something totally different.

cjbb
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Well, it looks like both my wife's name and her brother is on the mort int. 1098. However we write the check for the mortgage every month so we'll probably still take all the deduction depending on the advantages over splitting it.
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