Taxpayer Fails to Show He Was Either Equitable Owner of Residence or That He Actually Paid Mortgage Interest Claimed

In order to claim a deduction for interest paid that is otherwise deductible, generally a cash basis taxpayer must both actually pay the interest in question (since that controls the timing of deductions in that case) and be liable on the debt (since only a taxpayer’s own expenses are going to generally be deductible). However even if one is not directly liable on a mortgage on a principal residence, if the taxpayer is the legal or equitable owner of the property in question the taxpayer can still claim a deduction on that debt. [Treasury Reg. §1.163-1(b)]

In the case of Jackson v. Commissioner, TC Summary Opinion 2016-33, the taxpayer claimed to be the equitable owner of a residence he shared with his girlfriend in which they both lived and that he had paid amounts towards the mortgage that should enable him to claim interest deductions despite the fact that the Form 1098 was issued in his girlfriend’s name and he was not listed either on the deed for the property nor as liable on the debt.

Merely claiming that one is an equitable owner isn’t enough to carry this issue—rather, the question becomes whether that equitable ownership is recognized under state law. In this case the state in question was Nevada.

The good news for the taxpayer was that, as the Tax Court noted, Nevada does recognize equitable ownership:

The Supreme Court of Nevada recognizes that unmarried cohabiting adults may expressly or impliedly agree to hold property as though it were community property. See W. States Constr., Inc. v. Michoff, 840 P.2d 1220, 1224 (Nev. 1992). In Hay v. Hay, 678 P.2d 672, 674 (Nev. 1984), the court cited with approval the holding in Marvin v. Marvin, 557 P.2d 106 (Cal. 1976), that courts should enforce express or implied contracts between nonmarital partners.

But merely the fact that Nevada recognizes such ownership in certain cases doesn’t mean that equitable ownership exists in this case. Rather, the Tax Court notes:

This Court has long recognized that a taxpayer may become the equitable owner of property when he or she assumes the benefits and burdens of ownership. See, e.g., Baird v. Commissioner, 68 T.C. 115, 124 (1977). In determining whether a taxpayer possesses any of the benefits and burdens of ownership of property, the Court considers whether the taxpayer: (1) has the right to possess the property and to enjoy its use, rents, or profits; (2) has a duty to maintain the property; (3) is responsible for insuring the property; (4) bears the property's risk of loss; (5) is obligated to pay the property's taxes, assessments, or charges; (6) has the right to improve the property without the owner's consent; and (7) has the right to obtain legal title at any time by paying the balance of the purchase price. See Blanche v. Commissioner, T.C. Memo. 2001-63; Uslu v. Commissioner, T.C. Memo. 1997-551.

In this case the taxpayer had a problem, because the Court found he was lacking in evidence that either he was the equitable owner or that he had actually made the payments claimed.

While he had a letter he was stated was from his girlfriend indicating that they had shared ownership, the Court found that this, standing by itself, was hardly sufficient.

The Court noted:

Considering the shared ownership arrangement that petitioner described, one would reasonably expect that petitioner and Ms. Furney would have committed the terms of their agreement regarding ownership of the residence to writing. Yet the record is bare of any written statement of their respective rights to possess the property or to share in the benefits and burdens of ownership. Because she held legal title to the residence and was the sole mortgagee, Ms. Furney’s testimony would have been highly relevant to the question whether she and petitioner had agreed (expressly or impliedly) that he would hold an interest in the property (akin to that of a community property interest). See W. States Constr., Inc., 840 P.2d at 1224. Despite ample advance notice of the trial date and the Court's considerable flexibility in scheduling the trial in these cases, Ms. Furney did not appear as a witness.

The taxpayer also had no evidence of the payments he claimed to have made aside from the letter from the girlfriend who did not appear at the trial.

Petitioner did not provide any objective evidence that he paid the mortgage interest in issue or that he was the equitable or beneficial owner of the property in question. He did not produce any bank statements, receipts, or similar records to show that he transferred any amounts to Ms. Furney to pay the mortgage or other expenses related to the residence.

The deduction was thus disallowed.

The key lesson here is that while a deduction based on equitable ownership is allowed, the burden remains on the taxpayer to demonstrate that such an equitable ownership actually existed. In this case the lack of any written documents outlining the arrangements and the actual owner’s failure to show up at the trial and testify about the arrangement proved fatal to the claimed deduction. Note, as well, this result does not depend on whether or not the owner actually claimed the deduction in question—taxpayers can’t simply “assign” deductions at will and expect that position to survive should the IRS challenge it.