Who Can Claim the Mortgage Interest Tax Deduction With Co-Owners?

The mortgage interest tax deduction offers significant financial benefits for co-owners of property. It allows eligible taxpayers to lower their taxable income by the interest paid on a qualified home loan, making it a valuable incentive for homeowners.

Determining Each Party’s Eligibility

To qualify for the mortgage interest tax deduction, co-owners must meet IRS requirements, including legal liability for the debt and payment of mortgage interest during the tax year. Simply co-owning a property does not automatically qualify someone for the deduction—financial responsibility and actual payment are critical. For instance, if two people co-own a home but only one makes mortgage payments, only that individual can claim the deduction. The deduction applies to interest on up to $750,000 of mortgage debt for loans issued after December 15, 2017, under the Tax Cuts and Jobs Act.

Ownership arrangements, such as joint tenancy or tenancy in common, influence how deductions are divided. In joint tenancy, equal ownership may affect how deductions are split if both parties contribute to payments. Tenancy in common allows unequal ownership stakes, which impacts deduction proportions. Clear agreements on payment responsibilities help ensure compliance and avoid disputes.

Calculating Each Co-owner’s Share

A co-owner’s share of the mortgage interest deduction is determined by their contribution to the payments. The IRS permits deductions based on the actual interest paid by each individual. For example, if one co-owner pays 60% of the mortgage, they can deduct 60% of the interest. Accurate payment records, such as bank statements and receipts, are essential for supporting claims and creating an audit trail.

When payments are made from a joint account, co-owners must document their individual contributions. Records of deposits and payment sources are necessary to substantiate deduction amounts. If one co-owner pays more, their deduction should reflect this. Financial transparency helps ensure fair distribution of tax benefits and minimizes disputes.

Documentation Needed for Deduction

Claiming the mortgage interest tax deduction requires specific documentation. Form 1098, Mortgage Interest Statement, provided by the lender, details the total interest paid and is the primary document needed. Additional records, such as canceled checks, electronic payment confirmations, and bank statements, are also necessary to verify claims. Retaining a copy of the mortgage agreement helps clarify ownership and payment responsibilities.

Changes to mortgage terms, such as refinancing, affect deduction eligibility and require updated documentation. Refinancing impacts the deductibility of points paid, and taxpayers should refer to IRS Publication 936 for guidance. Keeping settlement statements and closing disclosures ensures compliance with IRS rules.

Filing Approaches for Joint Ownership

Filing taxes as a co-owner involves specific considerations for the mortgage interest deduction. Filing status significantly affects how deductions are claimed. Married co-owners often benefit from filing jointly, which can maximize deductions and reduce tax rates. However, filing separately may be advantageous if both spouses have substantial itemized deductions.

Unmarried co-owners must file separately, claiming deductions based on their actual payments. Clear communication and documentation are essential for accurate reporting. For properties owned through entities like partnerships or LLCs, the entity may need to file a separate tax return, with deductions allocated based on ownership percentages.

Adjustments When Ownership Changes

Ownership changes in co-owned properties require updates to mortgage interest deduction claims. The IRS mandates that deductions reflect the new ownership structure. If a co-owner sells their share during the year, they can only claim interest paid up to the sale date, while the buyer can claim interest from the date of purchase. Detailed transaction records, including closing statements, are critical for accurate reporting.

When ownership percentages change without a sale, the same principles apply. The mortgage lender must be notified, as this affects Form 1098 issuance. A written agreement detailing revised ownership stakes and payment responsibilities can help prevent disputes and serve as a reference for dividing deductions. Taxpayers should also consider potential gift tax implications for ownership changes without full compensation, as noted in IRC Section 2503. Consulting a tax professional ensures compliance with applicable regulations.