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:
- You must have secured debt on a qualified home in which you have an ownership interest.
- 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?
One 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. 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.