A common question on tax accounting blogs is who gets to claim the mortgage interest deduction when the home is jointly owned. Or, who gets to claim the property tax deduction?
Given how often this question arises, it is surprising that the IRS has never clarified the rules. None of the IRS publications that I’ve reviewed deal with the question of who gets to claim the deduction when the property is jointly owned. For example, Publication 936, dealing with the mortgage interest deduction, includes a paragraph that says:
More than one borrower. If you and at least one other person (other than your spouse if you file a joint return) were liable for and paid interest on a mortgage that was for your home, and the other person received a Form 1098 showing the interest that was paid during the year, attach a statement to your return explaining this. Show how much of the interest each of you paid, and give the name and address of the person who received the form. Deduct your share of the interest on Schedule A (Form 1040), line 11, and print “See attached” next to the line.
Great. This tells you how to report the shared deduction, but says nothing about how to allocate the deduction between the two borrowers. The question arises regularly for same-sex couples who share a residence and also share ownership of the residence. What if one partner pays 100% of the mortgage and property tax? Can that partner deduct the full amount of interest and taxes?
I think the answer is yes based on existing authority. But to be honest, in the past I’ve had trouble coming up with a satisfactory theory to support this result. In this blog post, I’ll take a stab at providing such a theory.
Assume, for example, that A and B are joint owners of the home, but A pays 100% of the property taxes and mortgage interest. Can A claim 100% of the deduction or should A be treated as making the payment on behalf of A and B – in which case A is making a gift to B as to half of the payment and A and B should deduct the amounts 50/50.
I can cite to plenty of authority for the proposition that so long as the person paying the interest and taxes has an ownership interest in the property then that person can deduct the full amount paid. There’s a 1971 ruling that applies this rule to spouses who own property as tenants by the entirety, but pay the interest and taxes other than equally. See Rev. Rul. 71-268.
The best discussion of this issue, outside the context of married couples is Powell v. Commissioner, T.C. Memo 1967-32. In this case, the taxpayer owned property as tenants in common with five siblings. Thus, her undivided interest in the property was one-sixth. Nonetheless she paid 100% of the property taxes due on the property for several years and she claimed a deduction for the amount paid. The Commissioner challenged her deduction to the extent it exceeded her pro rata share of property ownership, but the Tax Court sided with the taxpayer.
According to the court, the test for claiming a deduction is two-fold: (1) the taxpayer must actually pay the tax, and (2) the tax must be imposed against the taxpayer. See Treas. Reg. §1.164-1(a). Property taxes are rarely imposed against individuals. Instead they are imposed against the property. As a result, the test for deductibility should be whether or not the taxpayer is at risk of loss of his or her ownership in the property through failure to pay the tax. In almost every state, a one-sixth owner of property would risk loss of his or her ownership interest even if one-sixth of the taxes were paid because taxing authorities do not foreclose tax liens against undivided interests in parcels. They foreclose against the entire parcel. As a result, any owner of the property is at risk of loss for nonpayment of taxes. Thus, any owner who pays the taxes ought to be entitled to a deduction for the amount paid.
I can find only one case to the contrary and it involved the special application of Pennsylvania law which appears to create separate tax liens against undivided interests in property. So, if a one-sixth owner did pay one-sixth of the taxes, her interest would be safe from a tax foreclosure sale. As a result, she could only deduct one-sixth of the taxes. See James v. Commissioner, T.C. Memo 1995-562 (holding that the deduction must be claimed pro rata under Pennsylvania law where property taxes on jointly owned property are assessed separately against each co-owner).
Thus, I think that as a matter of positive law, outside of the special circumstance of the James case, when A pays 100% of interest and taxes A is entitled to claim 100% of the deduction. See also Conroy v. Commissioner, T.C. Memo 1958-6. I also think the reason that tax theorists question whether this is the correct result is that they believe A has the right to recover 50% of this payment from his co-owner, B. If A fails to pursue his right of contribution against B, then it looks like A is making a gift to B. Right?
Maybe. Let’s take a closer look at this “right of contribution.” Property taxes and mortgage interest are current expenses that protect the right to occupy the property for the year in which they are made. Joint owners, whether they own as joint tenants or as tenants in common, are each entitled to occupy and possess 100% of the premises. This is a blackletter rule of property law. Thus when A pays the interest and taxes, he is primarily protecting his own right of possession.
Another property law rule is that if one co-owner makes current payments that are necessary to protect everyone’s interest in the property (e.g., payments of mortgage interest and property taxes), there is sometimes a right to claim a contribution from the other co-owner. But this rule is not so clearly a blackletter one and it varies greatly from state to state. Some states say that a voluntary payment of interest and taxes on the entire property does not give rise to a right of contribution. Some states say that the co-tenants must have an agreement to contribute pro rata before there is any right of contribution. In California, there appears to be a different rule for joint tenancies and co-tenancies, with the former providing no automatic right to contribution. Thus, in many states, when A pays 100% of the interest and taxes, it is questionable whether an enforceable right of contribution in fact arises, especially if the tacit (or explicit) agreement between the parties is that A is to make the full payment.
In that case, it is much easier to view A as making a 100% payment that should be treated as his deduction. After all, the mortgage liability, if it is in fact recourse, typically makes each co-owner jointly and severally liable. A is thus not paying B’s mortgage interest, but, as with the property taxes, is paying a liability imposed upon him. If the interest is not paid in full, A risks losing his property.
Therefore, as a matter of positive law and as a matter of theory, in many cases, although perhaps not all, a joint owner who pays more than his pro rata share of mortgage interest and taxes ought to be able to claim a deduction for the full amount paid. The key question is who made the payment. And, of course, in California, Washington, and Nevada, if the property is owned by Registered Domestic Partners, the payments will likely be made out of community funds. As a result, no matter who signs the check, the deductions should be claimed 50/50.