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 legislation, but qualified 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 essential prerequisites.

Scenario: An itemizer can generally deduct mortgage interest on an “acquisition debt,” which is a loan used to buy, build, or significantly improve a home. On a personal return, this is typically one of the largest deductions. To fit the bill for the discount, the credit should be gotten by a certified home, for example, your primary home or a subsequent home like a country estate.

The Tax Cuts and Jobs Act (TCJA) reduced the amount of interest that can be deducted from acquisition debt from $1 million to $750,000 from 2018 to 2025. Prior loans are protected by the higher limit. In 2026, the threshold is expected to return to $1 million.

The mortgage interest deduction is typically claimed by borrowers who are legally obligated to repay the loan directly. However, there are some limited circumstances in which deductions may be permitted, 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 utilized to construct a house and a different visitor house on the property. With Wells Fargo, the loans were refinanced twice. The terms stated that Wells Fargo’s approval was required 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 executed a quitclaim deed in which he gave Brother C, the taxpayer claiming the deduction in this instance, all of his interest in the property. 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.

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