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Friday, November 29, 2013


Two individuals borrowed money from the mother of one of them. A mortgage was prepared to secure the debt, but it was not recorded in the public records.

Oftentimes, mortgages are not recorded between friends and family. They will allow the holder to foreclose on any debt defaults, so they still provide protection to the lender. However, other lenders are not on notice of the debt and thus the mortgage may be subordinated to later mortgages and security interests.

The borrowers sought to deduct interest that they paid to the lender.  Code Section 163(h) prohibits an interest deduction for personal interest, but provides an exception for qualified residence interest.  The statute requires that to be qualified residence interest, the debt must be “secured by the residence.”

The taxpayers asserted that an unrecorded mortgage still secures the related debt. What beat the taxpayers here was Treas. Regs. § 1.163-10T(o)(1), which requires that a mortgage be “recorded, where permitted, or is otherwise perfected in accordance with applicable State law.” Thus, the Tax Court denied the deduction, and thus reminds taxpayers that if they want an interest deduction in these situations, they will need to record the mortgage.

Christopher DeFrancis and Jennifer Gross v. Commissioner, T.C. Summary Opinion 2013-88

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