Taxpayer Denied Mortgage Interest Deduction - Equitable Ownership Claim Rejected.
(Parker Tax Publishing November 15, 2014)

Tax Court held that a taxpayer could not take mortgage interest deductions for payments she made on her brother's behalf as she was unable to prove that she was an equitable owner of her brother's house. Puentes v. Comm'r, T.C. Memo. 2014-224 (10/27/14).

In 2002, Lourdes Puentes's brother, Benjamin Puentes (Benjamin), bought a house in South San Francisco. Benjamin made the required down payment and financed the balance of the purchase price with a mortgage loan secured by the property. Lourdes started living in the house in 2003, when she moved to San Francisco to attend college, and was later joined by her ailing father in 2005. Benjamin made all required mortgage payments on the property until he became unemployed in 2009, at which point Lourdes took over the mortgage payments, even though she was not obligated to do so. In 2010 she continued to make the mortgage payments and also paid the property taxes and homeowner's insurance in full.

On her 2010 tax return, Lourdes claimed a mortgage interest deduction with respect to her payments. The IRS issued her a notice of deficiency disallowing this deduction, and she petitioned the Tax Court.

After conceding that she was not the legal owner of her brother's house, Lourdes contended that she was nonetheless entitled to claim a mortgage interest deduction as an equitable owner of the property because she resided in it during 2010 and made the required mortgage payments.

OBSERVATION: The Tax Court had previously rejected this claim when Lourdes had taken the same position in a prior case involving her 2009 tax year. As additional support for the 2010 deduction, Lourdes pointed to the facts that in 2010, she paid the homeowner's insurance, paid the property taxes, and made contributions toward maintenance of the property.

Under Reg. Sec. 1.163-1(b), a taxpayer may deduct interest paid on a mortgage upon real estate of which he or she is the legal or equitable owner (as determined by state law), even though the taxpayer is not directly liable for the bond or note secured by the mortgage. A taxpayer becomes the equitable owner of property when he or she assumes the benefits and burdens of ownership. Under California law, the owner of legal title to property is presumed to be the equitable owner as well. One way to overcome this presumption is by showing that there exists an agreement or understanding between the parties transferring the benefits and burdens of ownership. The presumption cannot be overcome solely by tracing the funds used to pay for the property.

The Tax Court held that Lourdes was not an equitable owner of her brother's property, The court pointed out that she offered no evidence of an agreement with Benjamin providing her with an ownership interest in the property. The court further concluded that the fact that she paid the mortgage, home insurance, and property taxes during 2010 was not sufficient to make her an equitable owner of the property under California law. Noting that the record was devoid of any other evidence that she had an ownership interest in the property, the court held that Lourdes was not entitled to deductions for mortgage interest she paid on her brother's behalf.

For more on mortgage interest deductions, see Parker Tax ¶83,515. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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