Discussion:Beneficial Ownership/Mortgage Interest Deduction
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Discussion Forum Index --> Tax Questions --> Beneficial Ownership/Mortgage Interest Deduction
| 9 February 2007 | |
| I have read through various other posts regarding this subject, but wanted to get some additional feedback if possible. This relates to section 1.163-1(b)
BACKGROUND: I prepare both clients returns (Mom and Child). Mom is only one on deed/legal title. Mom is only one listed on mortgage. Child lives with Mom. Child pays one half of mortgage payment, Mom the other half. Mom has payment made to lender, directly debited from Moms checking account. Child deposits one half of mortgage payment into Moms checking account to cover childs half. Under the beneficial ownership rules, I have deducted one half of mortgage interest on Moms return, and one half mortgage interest on childs return. I have always attached a statement in both returns stating mortgage is under Moms social security number, that we are splitting, etc.. Child also pays portion of utilities. Question 1 - Regarding the property taxes, I was always under the impression (but cannot site code) that in order to deduct the property taxes, one MUST be on legal title to the property. Anybody else have feedback on this issue? Question 2 - If we continue to claim the mortgage interest in the above arrangment, what happens if Mom sells property? Original purchase $150,000, 15 years ago, now worth $600,000. Mom is single. If property is sold, could both Mom and child claim the $250,000 section 121 exclusion? Question 3 - What if Mom dies while owning home. Would only 1/2 of the property value get a stepped up basis, since Child is claiming "beneficial ownership"? Seems like it would, because if whole house basis was stepped up, seems gets best of both worlds, claiming mortgage deduction, and getting 100% step up basis, which sounds to good to be true. Mom does not want to add Child to title due to other non tax considerations. Question 4 - Lastly, Mom asked "what if I deduct all interest this year as I made a lot of money". I advised you cannot flip back and forth, if Child is continuing to make one half payments. I advised if they flip back to having Mom tale 100% of deductions, they should keep it that way. Any thoughts or feedback on this? Thanks for any guidance. | |
| 9 February 2007 | |
| 3) under the rule for property owned jointly with a non-spouse, there is the %age of contribution to purchase rule. If mom provided all the consideration to purchase, then 100% is pulled into her estate and 100% stepup. If son had made what amounts to 20% of the total consideration paid to purchase, then 80% stepup. This would be extremely difficult to prove, as most people don't keep 30 years of cancelled mortgage checks. But nothing about taxes is easy. | |
| 9 February 2007 | |
| The beneficial owner is entitled to claim a deduction for any taxes that he may have paid. See Paul Trans, et ux., TC Memo 1999-233.
Upon death, only one-half of the property will receive a step-up in basis. | |
| 18 February 2007 | |
| Based on the information provided, I am not convinced that Child necessarily has a beneficial ownership in the property. When was the property acquired? Did Child contribute any money for the down payment? When did Child start paying for half of the mortgage? If the equity in the house (FMV less mortgage) at the time Child started paying half exceeded 20K (so that half exceeded 10K), was a gift tax return filed? I haven't researched this, but I would think that simply starting to pay half of the mortgage and taxes would not create a beneficial ownership. | |
| 18 February 2007 | |
| A beneficial owner has assumed the benefits and burdens of property ownership, including risk of loss, responsibility to insure, legal right to share in the appreciation, the right to improve the property, and the right to acquire title to his portion of the property by satisfying the mortgage. Based on the original post, we don't really know if any of these factors are present. | |
