Couple Wins Deductions with Respect to Home in Their Son’s Name

 

A couple was entitled to mortgage interest and property tax deductions with respect to their home which had been purchased by their son and was held in his name. Njenge v. Commissioner, T.C. Summary 2008-84 (7/15/08).

 

Ndile Njenge and his wife, Ekinde, deducted home mortgage interest and real estate taxes on Schedule A of their 2003 Form 1040. Because the couple had filed for bankruptcy in 2001, they were unable to obtain a mortgage. Thus, their son, Muabe, obtained a mortgage and bought the home upon which the deductions were taken. Mortgage payments on the property were made by Camrock General Engineering Co., of which Ekinde was a registered agent and Muabe was president. The mailing address of Camrock General Engineering Co. was Ndile and Ekinde’s home.

 

The IRS argued that because the couple had no legal obligation to make the mortgage payments and did not hold legal title to the home, they were not entitled to deduct the mortgage payments. Further, the IRS said that the couple did not make any mortgage payments on the home as such payments were made by Camrock General Engineering Co. Ndile and Ekinde countered that while their son held legal title to the home, they owned Camrock General Engineering, and through the company they had assumed payment of the mortgage from its outset. The mortgage payments were made from a bank account registered to Camrock General Engineering, of which Ndile and Ekinde were signatories.

 

Generally, for mortgage interest to be deductible by the taxpayer, the debt must be an obligation of the taxpayer and not an obligation of another. Where a residence is occupied exclusively by a taxpayer and all mortgage payments are made by the taxpayer, the debt may be found to rest solely on that taxpayer. Conversely, where title to the property and the related mortgage are held by another, the taxpayer does not have the exclusive burdens and benefits of the property and is not entitled to a deduction. However, where the taxpayer is the equitable and beneficial owner of the property, enjoying exclusively the burdens and benefits of the property, interest payments are deductible by that taxpayer.

 

The Tax Court held that Ndile and Ekinde were the equitable and beneficial owners of the home and could thus deduct mortgage interest and real estate taxes on the property. According to the court, the evidence showed that Camrock General Engineering was not operating as an active business when the payments were made through the company. Ndile had testified that the corporation was experimental and that it never actually began business. When it was suspended, the couple was left with a fully-established bank account, which they used to pay bills. Further, Muabe did not reside at the property with his parents and his parents paid for all maintenance of, and taxes on, the property. Thus the court found that they held exclusively the burdens and benefits of the property, using Muabe’s name solely to acquire a mortgage loan.