A new client
comes in to meet with you. Let's call him Burley. Burley lives with his
girlfriend, Julie, who purchased a house. The deed and mortgage is in her name,
as Burley has lousy credit. He would have been no help with a mortgage
approval.
Burley and
Julie consider themselves domestic partners with equal ownership of the house.
Burley pays
Julie $1,000 a month as "interest only" mortgage payments. Burley is
not a big fan of bank accounts, preferring to conduct much of his activity in
cash. This means he does not have cancelled checks to back-up his claim.
QUESTION: Does Burley have a tax deduction for mortgage interest?
The first
problem is that Burley does not own the house.
This may
seem fatal, but there is a loophole. Many states recognize the doctrine of
equitable ownership, and their courts will enforce express or implied contracts
between nonmarital partners. It is possible to have a tax deduction, even if you
are not on the deed or mortgage, as long as your nonmarital partner is and you
can prove such a contract.
But while a necessary
first step, the tax Code goes further. It wants to see that the equitable owner
has taken on the burdens of ownership as well as the benefits. Such burdens,
for example, would include:
(1)
the right to use the property and enjoy its use
(2)
a duty to maintain the property
(3)
a responsibility to insure the property
(4)
the assumption of risk of loss
(5)
a responsibility to pay taxes and assessments
(6)
the right to improve the property
Burley pays $1,000 a month, which
amount would cover his share of the mortgage payment, as well as (supposedly)
his share of the insurance, taxes and other expenses of ownership. The amount
does not vary for repairs, or for snow removal in the winter or lawn-mowing in
the summer.
That sounds a lot like rent.
It would help if the arrangement
between Burley and Julie were reduced to writing. After all, real estate is a
significant purchase for most people, and it is not be unreasonable to want the
agreement documented.
Burley and Julie of course have no
such document.
Well, at least Julie could show up in
person at the hearing and answer the judge's questions. Considering that Burley
has little proof to provide on his own power, her testimony would be important.
Julie doesn't want to do that,
however, but she is willing to send a letter instead.
The case is Jackson, and it is a pro se Tax Court case decided in July.
Jackson lost, which is about as
surprising as daily summer showers in south Florida.
Here is the Court:
Because she held legal title to the residence and was the
sole mortgagee, [Julie's] testimony would have been highly relevant to the
question whether she and petitioner had agreed (expressly or impliedly) that he
would hold an interest in the property.... Despite ample advance notice of the
trial date and the Court's considerable flexibility in scheduling the trial in
these cases, [Julie] did not appear as a witness."
What happens when you anger the
Court?
Under the circumstances, we give no weight to [Julie's] ... letter to respondent's counsel related to petitioner's history of transferring funds to her."
This was the Court's polite way of
saying "we do not believe you."
