[APangel428]

I have a slightly interesting situation... I purchased a condo with my mother in 2005, but she was the only one named on the loan as her credit was much better than mine at the time. I am, however, on the deed of the condo. Since that time, I have paid all costs associated with owning the home (i.e. the mortgage, the taxes, the condo fees, the maintenance etc.). She does not live with me and this is her "secondary" home.

Last year, my accountant told me my mother could sign a 1096 which would enable me to write off the home mortgage interest (so long as my mother didn't, as well). We did just that and everything was fine.

I went to a different accountant this year and he said just the opposite: that I can't claim any of the interest since I'm not on the loan, regardless of me being on the title and my mother signing a 1096.

I'm getting conflicting messages from the IRS, as they say I can write it off so long as I'm legally liable for the loan. Is being on the title sufficient to prove that I am legally liable for the property?

This is becoming a sticky situation as I have now moved and will be renting out the property. I will now have to claim the rental income and I'll inevitably be in a sticky situation if I cannot claim the mortgage to offset this new income.

Thanks in advance!

[MukatA]

You can deduct mortgage interest only if
*You must be legally liable for the loan. You cannot deduct payments you make for someone else if you are not legally liable to make them. Both you and the lender must intend that the loan be repaid. In addition, there must be a true debtor-creditor relationship between you and the lender.
*The mortgage must be a secured debt on a qualified home.

Secured Debt.
Your mortgage is a secured debt if you put your home up as collateral to protect the interests of the lender. If you cannot pay the debt, your home can then serve as payment to the lender to satisfy (pay) the debt.

[ebaines]

You are not legally obligated for the loan, since you are not a signer, so you can not deduct the mortgage interest. From Pub 936
Publication 936 (2007), Home Mortgage Interest Deduction

You cannot deduct payments you make for someone else if you are not legally liable to make them.

One way to get around this is to refinance and this time have both your names as co-signers of the loan.

I don't understand what you're saying about a 1096 - does your mother have a business where she is issuing 1099's and W2's? Or do you mean that your mother signed a 1098 - meaning that she charged you interest on a home loan?

[APangel428]

Thanks. My original accountant had her sign a 1096 (http://www.irs.gov/pub/irs-pdf/f1096.pdf). She doesn't have a business or issued me any 1099's or W-2s. Somehow (which is why I'm unclear) that magically made it okay for me to deduct the interest instead of her deducting it.

[AtlantaTaxExpert]

The consensus seems to be that you cannot deduct the interest on the original loan, and I agree with that consensus.

That said, what could have been done was to have your mother originate a separate loan to you, using your house as collateral. She would then deduct the interest of the original loan on her return, while charging you an equal amount of interest on her loan to you and claiming that interest as income. It would have the effect of being a "wash" for her.

Under that arrangement, the 1096 would be used in conjunction with a Form 1098 to you.

This is all rather complicated and, In my opinion, unnecessary. Just refinance the property with you BOTH being on the loan, then EITHER of you can deduct it on your respective tax returns because your would BOTH be jointly and severally liable for the loan.

[APangel428]

Thanks for the clarification! I will try to refinance and get this squared away.

If I am not able to, I will still have to claim the rental income next year. Aside from the standard deductions (advertising, insurance, depreciation etc.) is there anything I can do to offset this income? The mortgage interest would clearly do that, but in the absence of that, I'm concerned.

[AtlantaTaxExpert]

Sorry, but absent the legal obligation to pay the loan, you cannot deduct the interest, and are therefore stuck!