Son Could Deduct Mortgage Interest as Equitable Owner of his Mother's House.

(Parker Tax Publishing February 8, 2015)

The Tax Court held that a taxpayer's family had granted him an equitable interest in his mother's house and was therefore allowed to take interest deductions for mortgage payments he made on the property. Phan v. Comm'r, T.C. Summary 2015-1.

Background

In 2008, Qui Van Phan moved into a house on a three-acre ranch in California to help his mother, who was unable to care for the property herself. In 2010, the legal title to the property was held by Phan's mother, brother, and father. His brother and father were not living at the property. During this time, his mother was in the process of divorcing his father. Although Phan was not able to buy the property himself, he entered into an oral agreement with his mother and his siblings that he would pay the mortgage loan and the property taxes and these payments would increase his equity interest in the home. Phan's name was eventually added to the legal title to the property in 2013.

On his 2010 tax return, Phan claimed a $35,880 deduction for home mortgage interest paid on behalf of his family. In 2013, the IRS issued a notice of deficiency disallowing the interest deduction and determined a deficiency of $8,970. Phan petitioned the tax court, claiming he was entitled to the mortgage interest deductions as an equitable owner of the property.

Analysis

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 an agreement or understanding exists 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 found that Phan had testified credibly that his family had granted him an interest in the property and would allow him to add his name to the title at any time if he paid the property expenses. The court stated it has previously held that a taxpayer may become the equitable owner of property if he or she assumes the benefits and burdens of ownership, and noted that the agreement and his conduct showed he was a beneficial owner of the property.

The court noted Phan resided at the property in 2010, consistent with his right to possess and enjoy use of the property, and also took a number of actions consistent with performing his duties, responsibilities, and obligations under the agreement with his family. The court also pointed out that Phan made the mortgage payments before, during, and after 2010. The court further noted that he testified credibly that he made the property tax and insurance payments, paid the cable bill, maintained the property, and made improvements to the property. As a result of these actions, he was granted the right to add his name to the legal title to the property. Based on these facts and circumstances the court concluded that Phan provided clear and convincing evidence that he was an equitable owner of the property in 2010, and was thus allowed the mortgage interest deductions.

For a discussion of 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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