Deducting Mortgage Interest When Your Name Is Not on the Deed

Tax law has an amazing break for unconventional homeowners.

You can deduct your mortgage interest payments even when the deed to the house and the mortgage are in someone else’s name.

Here’s what happened to Sue Davis.

Sue could not personally qualify for a home loan. Her parents stepped in to help. They bought the house and signed the mortgage.

But Sue lives in the home and pays all the expenses of the property, including the property taxes and the mortgage.

Using a little-known tax rule, Sue deducts the mortgage interest payments she makes on her Form 1040.

What’s even more interesting is that Sue found out about this little-known rule after she had been making payments for a few years. Once she learned the rule, Sue amended three years of tax returns, claiming about $18,000 per year in deductions, and got a sizable tax refund.

If you are in a similar situation, you can get these tax breaks too. You simply need to prove that you are the “equitable owner” of the property.

‍

Who Can Claim the Mortgage Interest Deduction?

If you make payments on a mortgage that is not in your name, you can deduct the interest as long as you are the legal or equitable owner of the property that secures the mortgage.

“Legal” title and “equitable” title are two different things. You just need one or the other to qualify for the interest deduction.

Legal title. This simply means legal ownership according to the real estate laws of your state. In general, legal title requires a deed of ownership that is properly recorded according to the laws of your state.

Equitable title. Under this doctrine, you prove that even though you do not have legal title, you bear the benefits and burdens of the property and are thus the true owner under the law for certain purposes.

‍

Legal Title Is Cleanest—but Not Always Best

For Sue, her parents were the legal owners of the property and the only debtors named on the mortgage.

Sue did not think a transfer of legal title was a good solution in her case. Even using a quitclaim deed—which is a deed that transfers the grantor’s interest in the property without any warranty of title—she worried that the mortgage’s due-on-sale clause would trigger full payment of the balance.

Depending on the property laws of Sue’s state and the terms of her mortgage, this is a valid concern—so on that point, we will defer to the expertise of Sue’s real estate lawyer.

Key point. If you can obtain legal title without triggering negative consequences in your mortgage, this is the simplest and cleanest way to ensure that you qualify for mortgage interest deductions.

‍

Percentage of Ownership

What if you acquire only a portion of the legal title to the property, such as 15 percent? Can you still get a full deduction for the mortgage interest if you pay 100 percent of the mortgage?

In general, legal title gets you a deduction only to the extent of your ownership. For example, in the Daya case, a 5 percent owner claimed to pay more than her share of the mortgage interest, but the court limited her deduction to 5 percent of the mortgage interest paid that year.

Planning tip. If you have partial legal title but pay more than your share of interest, combine your legal title claim with an equitable ownership claim to get a full deduction for the interest payments that you make.

‍

Equitable Ownership

Equitable ownership is a legal argument that you can use to qualify for the mortgage interest deduction when you do not have legal title (or full legal title) to the property; and you make payments on a mortgage that’s in someone else’s name.

The Uslu case serves as an excellent guide for this claim. In that case, Saffet Uslu successfully won full deductions for his mortgage interest payments even though he had no legal title to the property and was not named on the mortgage.

Saffet could not qualify for a home loan because of his poor credit. He asked his brother Haluk Uslu to purchase the home in his name and take out the mortgage. Being a good brother, Haluk did just that.

Thus, Haluk alone had legal title to the property.

But Saffet proved that he was the equitable owner based on the following factors:

• He and his family exclusively occupied the home.
• He made all the mortgage payments.
• He paid for all home expenses, including repairs, maintenance, and improvements.

‍

The Equitable Ownership Test

When a court considers an equitable ownership claim, the judge looks at all the facts and circumstances of the situation. The factors the courts consider are

• right to possess the property and enjoy its use, rents, or profits;
• duty to maintain the property;
• responsibility for insuring the property;
• risk of loss on the property;
• obligation to pay the property’s taxes, assessments, or charges;
• right to improve the property without the legal owner’s consent; and
• right to get legal title at any time by paying the balance of the purchase price.

You don’t have to prove every single element in the list, but you want to show as many as possible. The more elements you have on your side, the stronger your case will be.

‍

Takeaways

Tax law is surprisingly fair when it comes to your mortgage interest deductions. Under the equitable ownership rule, you can get a deduction for the mortgage interest you pay even if you don’t own the house and are not listed on the mortgage.

But don’t forget about the legal title option. If you can obtain legal title without triggering adverse consequences in the mortgage, this is the simplest solution to your problem. Check with a real estate attorney in your state to see whether a transfer of legal title will work for you.

‍