The new case includes a complicated series of exchanges where three siblings intermixed their business and individual interests.
Can mortgage interest on a home you own be deducted? The rules have been tightened by recent tax laws, but expert borrowers may still be eligible for generous write-offs. Anyway as displayed for another situation, Shilgevorkyan, TC Update 2023-121, 1/23/23, you should meet a few needed conditions.
Scenario: An individual can generally deduct mortgage interest on a “buying debt,” which is a loan use to buy, or significantly improve, a home. On a personal return, this is usually one of the largest deductions. To fit the bill for the rebate, the credit should be got by an expert home. For example, your primary home or a following home like a country estate.
The TCJA decreased the deductible amount of acquisition debt interest from $1 million to $750,000 from 2018 to 2025. Prior loans are protecting by the higher limit. In 2026, the limit is expecting to return to $1 million.
The mortgage interest deduction is typically claim by borrowers who are legally oblige to repay the loan directly. However, there are some limited circumstances in which deductions may permit, such as recourse loans.
The new case’s details: The new case involves a complicated series of deals between three brothers who had business and personal interests mixed.
Brother A paid $1,525,000 for a house in Paradise Valley, Arizona, in 2005. Together with his wife, Brother A obtained a $1,143,750 Wells Fargo bank loan after putting down $392,896. In addition, Brother B provided the couple with a $1.2 million construction loan secured by the Paradise Valley residence.
The development credit reserves were utilizing to construct a house and a different visitor house on the property. With Wells Fargo, the loans were refinancing twice. The terms stated that Wells Fargo’s approval was require for any transfers. In addition, the borrower agreed in the deed of trust that the Paradise Valley property would serve as their primary residence for at least one year.
In 2010, Brother B transferred his interest in the property to Brother C through a quitclaim deed. Wells Fargo was not asked to approve the transfer, and neither Brother C paid anything to Brother B.
Even though he briefly resided in the guest house, Brother C never claimed the Paradise Valley property as his primary residence, with a few exceptions. Brother C deducted $66,354 from his federal income tax return for 2012 for mortgage interest paid on the Paradise Valley property—half of the total mortgage interest paid on the loan in 2012, as reported by Wells Fargo. The deduction was denied by the IRS.
Tax result: The IRS won at the Tax Court, Despite the quitclaim deed, Brother C failed to demonstrate that the acquisition debt was his obligation. That he possessed any ownership rights under state law, or that he had a qualifying residence.
The tax laws are very complex. Our short blog articles cannot fully cover all the rules and nuances. Your specific facts may hold various opportunities and possible risks that only trained, highly qualified tax accountants and tax Lawyers can spot. We encourage you to find such help, rather than trying to figure it all out on your own. Consider giving this marketplace a try by posting your project and signing up here.
If you are a licensed tax professional interested in helping others either part or full-time, or ad hoc, come on in! Happy to have you. Our marketplace has the full suite of tools to communicate with clients including compliance calendars, task and message management, and billing. You can also quickly connect to knowledgeable colleagues who can complement your services with the ones you do not provide. Register here.