Interest paid on a secured loan the proceeds of which were used to acquire the taxpayer’s primary residence is deductible to the extent incurred on the first $1 million of the loan’s principal balance. Where a home has multiple owners, questions arise about the sharing of the interest deduction among the co-owners. In a recent Chief Council Advice (201451027), the IRS set forth some helpful guidance.
The IRS determined that each co-owner may deduct the portion of the interest that he or she actually pays. The fact that a person has a 50% ownership interest in the home does not necessarily limit that person to a deduction of 50% of the total interest if he or she pays more than 50% of the total interest on the home loan. For example, if you own a home jointly with one of your children or grandchildren and pay all of the interest on the loan, you may take a deduction for all of the interest that you pay (subject to the $1 million principal limit), even though you have only a 50% ownership interest in the home. In this situation, you should be aware that your payment of all of the interest would result in your making a taxable gift to your child or grandchild of the portion of the interest that is not attributable to your ownership interest in the home. If you are an equal co-owner with your child or grandchild and you pay all of the interest on the loan, half of the interest that you pay would be considered a gift for gift tax purposes.
If the co-owners pay the interest out of a joint account, there is a presumption that each paid half of the interest. This could arise, for example, where a married couple pays interest on their home mortgage from a joint account, but file separate income tax returns. Absent any evidence to the contrary, it would be presumed that each spouse paid half of the interest and was entitled to a deduction for half of the interest. This circumstance could also arise where an unmarried couple owns a home together and maintains a joint bank account which is used to pay interest on their home mortgage.