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Understanding the Home Mortgage Interest Deduction, Part Two

by Laura Adams

In my last article, Understanding the Home Mortgage Interest Deduction, Part One, I gave you an introduction to the mortgage interest tax deduction and told you what’s required to claim it. You learned about the two major hurdles you have to jump over to qualify for it:

  1. You must have secured debt on a qualified home in which you have an ownership interest.
  2. You must file your federal income taxes using Form 1040 and itemize deductions on Schedule A.

Who Can Claim Home Mortgage Interest Deduction?

We covered what a secured debt is, the types of properties that qualify for this valuable tax deduction, and other situations like what happens if you rent out your second home or have a home office. We didn’t cover the ownership interest requirement—so that’s what I’m going to focus on in part two. I saved it for last because it seems to be the piece that confuses people the most.

What if You Own a Home But Are Not on the Mortgage?

time for taxesOne of the reasons people who are eligible to claim the mortgage interest deduction don’t claim it, is because they don’t get a copy of Form 1098, Mortgage Interest Statement. Mortgage lenders are required to send out Form 1098 each year to the borrower(s) on record. It shows how much you paid in interest, mortgage insurance, and deductible points during the year.

Let’s say you own a second home at the beach with your brother. The agreement you made and put in writing was that if your brother got the mortgage, you’d be responsible for some of the minor handy work and you’d each pay 50% of the mortgage. Both your names are on the title of the property but your brother is the only one listed on the mortgage—so he’ll be the only one who receives Form 1098. But since he paid half of the mortgage payments, he’s only entitled to 50% of the mortgage interest deduction and you’re entitled to the remaining 50%.

Ideally, you should get a copy of Form 1098 from your brother to submit with your tax return. You should also:

  • write a note explaining that you’re an owner of the property even though your name isn’t on the mortgage
  • include your brother’s name and address as the person who did receive Form 1098
  • show how much of the mortgage interest each of you paid

So, it doesn’t matter who receives Form 1098—if you own a qualified home with someone else and you paid mortgage interest (and itemize deductions on Schedule A), you can claim your share of the money-saving mortgage interest tax deduction.

What if You Own a Home But Are Not on the Mortgage or Title?

Another issue that comes up is whether or not you can claim the mortgage interest deduction when you’re not on the mortgage or on the title to a property. Here’s a question that I received:

My fiancé bought a home last year but I’m not on the title since my credit was not up to par. My fiancé does not work and I pay the mortgage. My question is if there’s any way I can benefit from this on my taxes or is it a complete loss for me?

In order to claim the mortgage interest deduction, you must have an ownership interest in a qualified property and be responsible for a secured debt. You’re not allowed to claim the mortgage interest deduction for someone else’s debt. So the answer to the question depends on whether the fiancé considers you an equitable owner or a renter. Without being on the title of the property or having a written agreement that you’re an owner who is indebted for the mortgage, you cannot claim the mortgage interest deduction.

What Amount of Mortgage Interest Can Co-owners Claim?

If you own a home with someone else, the rule is that you can only claim the amount of interest that you actually paid. Here’s a question about this issue:

My girlfriend and I co-own a house together 50-50. Both our names are on the mortgage and we each pay half of it. Do we both have to claim equal amounts of mortgage interest when we itemize? Or can one claim all of it and the other not itemize?

The answer is that you can only claim the deduction for the interest you actually paid. So if each person paid 50% of the mortgage, each person is only eligible to deduct 50% of the interest. However, if one person made 100% of the payments, they could claim 100% of the mortgage interest deduction.

Here’s another question:

My name is on a mortgage with my daughter-in-law. She and my son will not itemize deductions this year, but I will. Can I claim the total amount of interest even if I haven’t lived in the house? Can they take it in future years when they itemize?

The answer is that even if you’re indebted for a mortgage, you can only deduct interest for the payments you actually made. If the daughter-in-law and son made all the mortgage payments, they are the only ones entitled to the deduction, and they can take it in any year that they itemize. Unfortunately, if they don’t itemize, no one can claim the deduction.

Important Tips for Claiming the Home Mortgage Interest Deduction

As you can see, understanding who’s eligible to claim the mortgage interest deduction can be a little tricky. To give you some additional information and frequently asked questions about who’s entitled to claim the mortgage interest deduction, I created a video that you can download at SmartMovesToGrowRich.com.

Here are some final tips that can help protect you in the event of an IRS tax audit:

  • If you co-own a property and are not listed on the mortgage, never make monthly payments to a co-owner because that could be construed as paying rent. Instead, make payments directly to the lender so your ownership interest can’t be questioned.
  • If you co-own a property but aren’t named on the deed, have your ownership interest clearly defined in a written contract.
  • If you pay someone else’s mortgage debt for them, you can never deduct the mortgage interest unless you are indebted as an owner of the property.

To learn more about other kinds of money-saving tax benefits, be sure to read my recent posts on Money Girl or listen to the audio podcast.


Published or updated August 1, 2011.
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{ 38 comments… read them below or add one }

1 krantcents

This is good information! Good points to keep in mind before you enter into an agreement for a house.

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2 Doable Finance

If you don’t get 1098 by the end of January, call the lender and they will send you one. By law, you are supposed to get one by Jan 31.

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3 Prasad Narla

Hi Laura,

I just read part 2 of Understanding the Home Mortgage Interest Deduction.

I’m almost in a similar situation. I own the home 50% and my daughter 50%. But Form 1098 is on my name. But, we claimed 100% deduction in her tax return and I gave an explanation that she is the one paying whole mortgage interest and loan (she was not in the bank loan agreement when I bought the home. Now we can’t change the agreement as the home value is less than the mortgage value). since she is claiming 100% deduction, I did not claim any deduction in my return.

But, IRS refused to accept and disallowed her deduction. Could you please help me. I DO NOT MIND IF YOU CHARGE FOR YOUR TIME since this is a personal issue.

Thanks

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4 Laura Adams

@Prasad If your daughter itemized her deductions and can prove that she made 100% of the mortgage payments, I would dispute the IRS on this. She is entitled to the deduction. Call and speak to an IRS representative to find out if you’re missing something.

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5 Prasad

Laura,
Thanks for quick reply. As a matter of fact, I did send all doc evidence such as copy of my return, City’s records showing my daughter owns 50% share and copy of title where I have added my daughter with 50% ownership etc. Yet, IRS while sending notice, DID NOT EVEN REFER OUR EXPLANATION, but simply sent a letter saying they determined her claim is DISALLOWED. They further said if we want to dispute we can appeal before the Tax Court at Washington.
Pl advice

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6 Laura Adams

@Prasad I neglected to say that you should have a written agreement with your daughter that says she’s responsible for 100% of the debt.

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7 Prasad

Do we need to have the agreement documented any where or notarized?
Thanks

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8 Laura Adams

@Prasad It couldn’t hurt to have it notarized.–but I recommend that you find a local CPA who can look at your daughter’s return and all the supporting paperwork to advise you whether it’s worthwhile to push forward with a dispute. You would need to be represented by either a CPA, an Enrolled Agent (EA), or an attorney at tax court anyway.

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9 Kevin

Quick question. I am a renter and am currently working on fixing my credit and I am a couple of years away from being able to secure a mortgage. My landlord and I have come to an aggreement to buy the house in the future when I can secure the loan but would like to set an amortization schedule now so a portion of my monthly payment will come off the principal thus affecting the amount I actually have to finance down the road. I am wondering if there is a way I can claim some of the interest payments even though I am not on the note? Can he transfer a protion of it to me (provided we have some kind of contractual agreement stating our intentions)?

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10 Ryan Guina

You may be able to come up with a rent to purchase arrangement, but I would recommend having a lawyer review the contract to ensure that it spells out the rights and interests of each party. Any time you are dealing with a major financial purchase, it’s a good idea to put things in writing.

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11 danielle

hi I have a question my grandma passed away 3 years ago and left her house behind it wasn’t paid off so me and my husband decide to take it over and just pay the monthly payment every month. we are still both in our 20 and couldn’t get a mortgage cause we have bad credit. we get all the from to claim the taxes on the house every year but have don’t it isn’t sure if we are allowed. we make every monthly payment pay all the taxes on the house and the house insurance. are we allowed to claim it on our taxes at the end of the year?

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12 Ryan Guina

Danielle, I recommend visiting a tax professional for this question, and then an estate lawyer to help determine how to legally get the house in your name. This could cause problems own the road if you haven’t already done this.

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13 Kevin

Question? If I am in a rent to own contract should I receive a form 1098 and am able to claim the interest on the rent to own home.

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14 Buddy

I have a weird situation where I sold 5 duplexes on contract. The purchaser never fullfilled the contract and never paid the down payment. We did have a contract but I was paying on the orignal mortgage and everything was in my name (Taxes, title, etc.) He owned them for about 2 years and gave them back. I never gave him a 1098 but he deducted the interest and now the IRS wants him to pay. Any suggestions?

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15 tiffany

Have a question, me and my partner are buying a house but the loan will be just in her name but I will be on title, she is on disability and I claim her on my taxes, can I claim the interest since I claim her on taxes anyway?

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16 Ryan Guina

Tiffany, I don’t have a firm answer for you. I recommend speaking with a tax professional before making that move.

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17 J

My elderly mom is having trouble paying her mortgage, I am considering moving in with her and make 1/2 of the monthly mortgage payments. As of now, I currently rent and have no tax write-offs and wonder if there is a way for her to add me to her deed and mortgage for tax purposes. However, I do not want this to interfere with whatever benefits she may be receiving, such as medicaid, etc. Any suggestions on how we both can benefit tax wise from my moving in and helping her with her mortgage payments?

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18 Greg Balise

I have a second home in my name. My mother lives at this home and pays the mortgage payments and property tax payments herself. I do not profit of the payment and its way below market value. She actually pays about $330 a month for principal and interest. Am I able to deduct the mortage interest and property tax on my taxes. She does not work and does not file any taxes. I cant seem to get a clear answer from any one I ask.

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19 RosaLinda G Dryden

Here is my question which I will present as scenario: I bought a 2nd home as a rental investment due to that it was within the 75 miles and did not qualify as a 2nd home. The house is actually my sister’s home and she lives in it. I am the only one on the title and on the loan. She has been making payment directly to the lender however payments are in cash. There is no written agreement of ownership between us. I have not claimed this information in my taxes. I bought the house for them due to credit issues and would not qualify for the loan.
May I transfer the form 1098 amount to her so that she can claim it in her taxes?

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20 Huyen

Can my sister includes my name on the title of her property even I have bad credit? Will the lender checks my credit?

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21 Ning

I am a co borrower of the loans and the only one claiming 100 % of the mortgage interest deduction . But the form 1098 is not under my tax id, it ‘s under my coborrower ID number though he does not claim for it on his tax. Is this okay to put on schedule a line 10 or line 11?

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22 Ryan Guina

Ning, I recommend speaking with a tax professional about this situation.

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23 Marianne

My former BF recently got IRS audit as in 2011 I gave him my Mortgage interest on my house. They sent him a notice said his tax income mortgage deduction was more than what was reported to his name (he owns a small condo). I did give this mortgage interest amount to him in 2010 but it was not audited. Now the IRS wanted the 3500 refund back for the year 2011 income tax.

I want to dispute as I never claimed this amount in my income tax as I made nothing during that year. Is it OK to dispute and state that he helped me paying during my depression time & loosing business after loss my late parents back to back? Or can I say I give him this mortgage interest as we had previously agreed that he would help me such following…?

What is the best way to approach to refute this IRS refund charge back? I don’t have the money to give back, period.

Any sounded advice? Contacted CPA & Tax attorneys who both turned down to take my case but advised to pay up. Thank you.

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24 Ryan Guina

Marianne, I’m not a tax professional, but so far as I know, you cannot transfer deductions to another person for tax reasons, unless you are legally married. My recommendation is to follow the advice of tax professionals. They have experience in these matters.

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25 Ann Marie

HELP, I think I’m getting the short end of the stick!

I purchased my mom’s home from her in March of 2012 under an agreement of purchase that is not filed. I and have been making her mortgage payments since I do not qualify for a loan and it’s a VA loan to boot. The lawyer did not file the warranty deed putting me on the property as current owner (I filed it in January of 2014). The agreement that the lawyer wrote was that she could claim all interest and deductions from the loan payments so long as the loan is in her name. Was the lawyer correct in that she can legally claim the deductions? This will be the second year she is refusing to allow me to use the deductions and yet she is not paying gift tax or claiming it as income.

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26 Ryan Guina

Ann, I don’t think you can legally claim the interest deduction on a loan that isn’t in your name. This is something you will need to discuss with your lawyer and/or a tax professional.

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27 Israel

Hi, me & my girlfriend both purchased a property and both our names are on the 1098 form. I make about 65% of the payment for tax, mi, & mortgage but want her to claim 100% of the deduction to make things easier since I am deducting our 2 daughters. I don’t want to have to do the percentages on the the deductions . Will his be an issue in CA??

Thanks

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28 Ryan Guina

I don’t have a good answer here. I recommend speaking with a tax professional who can walk you through your specific situation. Best of luck.

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29 james rios

This is helping me out a bunch but the question I have is this. I own a house but I don’t live in it. My name is still on the mortgage, I have a partner who became a middle man or third party if you will, who helped “sell” the house to my renters, and now are owners, but if they don’t pay the gentleman who is the middle man is not responsible, I am, if anyone else defaults on this loan it falls on me, I am taken off the note only in the even that the the owners living in the house refinance or the third party guy refinances, other than that it is in my name for the next 3-4 yrs. What can I claim especially since they are behind and ruining my credit. I know I probably should not have listened to others and gone against my better judgement but I did. So now what?

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30 Noemi

Laura,

My sister and brother in-law helped me buy a house two years ago. I am not on title or mortgage but I make the mortgage payments and I can prove it. I understand that it is a challenge to deduct interest and property taxes since my name is nowhere. But if my name is added to title prior to filing taxes for 2013. Can I deduct them then?

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31 Kyle

Hi Laura,
Great article, thanks.
Can you offer guidance on the following? My wife and I live with my elderly parents. The home is in a life estate in NY with my parents as life tenants and me and my siblings as heirs.

We are planning to add an apartment to the home (commonly known as a mother-daughter as it is only legal in our township if the apartment is for a blood relative) for my wife and I. I spoke to our bank, who advised they will write the refi mortgage (with written consent from all the heirs, which will not be a problem). My wife and I will be paying 100% of the mortgage, so I would assume that besides holding the mortgage with my parents, a letter from them stating that we have paid 100% of the mortgage will suffice? This also will surely pass the smell test for “ownership interest.”

Any advice or thoughts are appreciated!

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32 Doug

My wife and I are paying on a piece of property with a mobile home on it. It’s considered one piece of property but with two addresses on it. Recently, my parents put up a modular home on the other part of the property. Currently my wife and I aren’t getting the tax benefits for the property payments/property taxes because my dad paid cash for the property and we’re paying him directly.
I’m going to ask my dad about me being added to thier home as an owner so I can deduct the payments. Or, can I make their mortgage payments and property taxes and deduct the interest and taxes without being added as long as I can show that I am the one making all the payments?

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33 Ryan Guina

That is a great question, Doug. This is a situation where you should speak with a tax professional help you set up a situation where you will be lawfully eligible to make the tax deduction.

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34 david heckathorne

i bought my parents a home six years ago for them to live in and they still do. the home and mortgage is in my name and my name only. i get a 1098 at the end of each year for taxes and interest paid. my parents pay me no rent.

i have never claimed a deduction of any kind for this home on my personal tax return.

can i claim the interest paid and real estate taxes on the home?

can i put the home on schedule e and claim all expenses and claim income what would be the fair market value as rental income?

DAVID

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35 Ryan Guina

David, you should speak to a tax professional about your situation.

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36 Mary-Lou

My daughter and her boyfriend bought a condo together her name is not on the deed or the mortgage is she entitled to claim any interest on her income tax? Does she have any rights to this property? She contributes to the monthly mortgage payments and has put down more of a down payment for the purchase of the condo then her boyfriend.

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37 Ryan Guina

Mary-Lou, I’m not sure what legal rights she has if her name is not on the mortgage. This could be a sticky situation if anything happens to their relationship. I highly recommend she speak with a real estate attorney to ensure she has her name added to the mortgage if possible, or at least have a legal document drawn up that gives her legal ownership in the condo.

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38 Judy Haliburda

My boyfriend bought me a condo only his name on mortgage. Both names on title. Who is responsible for taxes. I have full survivorship.

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