Tax Return- jointly owned home but one deducts everything

[John the third]

Not married, but have long term partner and we keep separate finances. We jointly own our home and both are on the mortgage debt. For 12 years, I was in a higher tax bracket, so I deducted 100% of the interest and property taxes while she took the standard deduction. We have a joint bank account which is used solely to pay for all our joint living expenses, including P&I, prop tax, insurance, HOA, utilities, groceries, eating out and entertainment. Round numbers, all this adds to $7k/month. When we bought our home, we both signed a simple letter saying the joint account would be funded $4000/mo by me and $3000 by her… and my contribution would be designated specifically to pay mortgage interest, property taxes, and whatever was remaining of my $4000 contribution would go toward all other expenses. Funds SHE contributed would specifically be designated to pay the insurance, HOA, groceries, etc etc. My name was first on the mortgage so the 1099-INT comes to me with my SSN on it. I retired in 2022 but she still works and earns a hefty W2 salary, so now we’d like to have HER itemize deductions and ME take the standard deduction. We signed a new letter agreement which says, starting 1/1/23, the funds SHE contributes into the joint account will be used to pay the mortgage interest and prop taxes, with whatever remains will be used for all the remaining expenses. My understanding is, to deduct interest and taxes, you must own the property, have a legal obligation to pay those items, and you must actually pay for the costs you are deducting. Does our letter agreement put us into a legal and acceptable position to now let HER itemize the deductions?

 

[Jerry1]

I don’t recall the process, but I think you need to handle the fact that the 1099 comes in your name. It may be as simple as calling it out on both returns, but I’m not sure.

 

[John the third]

Thank you. I’m aware there’s a way to indicate that you are deducting interest which was reported on a 1099 sent to another person. What I’m wondering is… does the IRS care that we have invented this arrangement so the deduction is claimed entirely by the person in the higher tax bracket? And we flip-flopped which one of us claims the entire deduction amount.

 

[Montecfo]

Pretty sure you can't allocate deductions for sole purpose of lowering taxes.

Note that if you were married filing separately, both must itemize if one does. That would certainly seem instructive.

 

[GrayHare]

As described, it sounds like mortgage interest should be her deduction. If a tax statement arrives instead in your SSN, you are a nominee, which is the keyword to research. For example, see https://andersonadvisors.com/dont-forget-nominee-1099s/

 

[cathy63]

Thank you. I’m aware there’s a way to indicate that you are deducting interest which was reported on a 1099 sent to another person. What I’m wondering is… does the IRS care that we have invented this arrangement so the deduction is claimed entirely by the person in the higher tax bracket? And we flip-flopped which one of us claims the entire deduction amount.

The IRS will only care if your partner takes the deduction if they happen to audit her return. They aren't going to figure this out through a document matching algorithm and send a letter, so any audit would be based on a random selection, and that's quite unlikely.

If they do audit her, then she needs to be able to prove to the auditor's satisfaction that she owns the home; it's used as her full- or part-time residence; and she paid the amount of interest she claimed. Ownership and residence should be easy, so the main question is whether the letter you both signed would be accepted as proof of payment of the interest.

I suspect the answer might depend on the auditor. Some might just take her word for it, but once money is in a joint account, it could also be argued that it's no longer his and hers and the deductions for items paid from that account should be split according to the percentage each contributed, so the earmark letter is irrelevant. There would be no question about her entitlement to the deduction if she could show the mortgage and property taxes were paid out of her separate account. (The same would have been true for you if you'd been audited during the first 12 years of ownership. Just because your SSN is on the 1098 doesn't mean an auditor wouldn't ask whether the co-owner also paid into the account the money came from.)

 

[cathy63]

Also, here's how the IRS says she should report this on her return (though of course it would be all instead of one-half): https://www.irs.gov/faqs/itemized-d...duction-questions/other-deduction-questions-2

Since your housemate and you each paid one-half of the mortgage interest and real property taxes, each of you should deduct one-half of these expenses. Individuals deduct these expenses as itemized deductions on Schedule A of their Forms 1040. Claim your deduction on Schedule A (Form 1040), line 8a, as “Home mortgage interest and points reported to you on Form 1098.” Your housemate, who didn’t receive a Form 1098, must list the amount of mortgage interest on Schedule A (Form 1040), line 8b, as “Home mortgage interest not reported to you on Form 1098” and must list your name and address as the person who received a Form 1098 reporting the interest your housemate paid. If your housemate files a paper return, your housemate should include an attachment to the paper return and print “See attached” to the right of line 8b. The attachment to the paper return should include your name and address and an explanation of how much interest each of you paid.

 

[athena53]

Two data points: I owned a house with a friend years ago, both of us on the mortgage, and asked an accountant at work about this. He said that how we spilt the deductions was up to us as long as the deductions we took didn't total up to more than 100% of the correct amount! We had it for 4 years and I forget who took the deductions for mortgage interest and property taxes but I don't think the IRS cared.

More recently: DH and I bought this house in 2015. Both of us on the mortgage and I see that only his SS is on the tax statement. DH died in 2016 and I haven't bothered informing the bank. They have cheerfully accepted monthly payments out of my bank account and I've been deducting the interest on my return and haven't heard a peep from the IRS. I'm not a tax accountant but I suspect the advice I was given on my earlier mortgage was correct.

 

[Montecfo]

Two data points: I owned a house with a friend years ago, both of us on the mortgage, and asked an accountant at work about this. He said that how we spilt the deductions was up to us as long as the deductions we took didn't total up to more than 100% of the correct amount! We had it for 4 years and I forget who took the deductions for mortgage interest and property taxes but I don't think the IRS cared.

Well you can only deduct an expense you actually paid. So in that regard I think that advice was not accurate.

And not hearing from IRS does not mean they do not care. Most of us will not be audited but that does not imply that everything was done correctly.

For the OP I think an approach going forward would be to make sure the taxpayer who wishes to deduct the expense is the one who pays it and has records which reflect this. Best would be to pay from separate funds. Using the joint account may suggest a different split such as 50:50 could be in order. But the letter might be helpful.