Joint Obligors–Who Gets the Interest Deduction

In a recent Chief Council Advice, the IRS summarizes and reaffirms various principles that can be applied to determine who gets an interest deduction for payments made on a home mortgage when there is more than obligor under the mortgage. The principles applied should similarly apply to other types of interest deductions.

The affirmed and announced principles are:

1. Funds paid from a joint account with two equal owners are presumed to be paid equally by each owner, in the absence of evidence showing that is not the case. [PLR 5707309730A; Mark B. Higgins v. Commisioner, 16 T.C. 140 (1951); Finney v. Commissioner, T.C. Memo. 1976-329]
2. A deduction in respect of the payment of interest on a joint obligation is allowable to whichever of the parties liable thereon makes the payment out of his own funds. [Castenada-Benitez v. Commissioner, T.C. Memo. 1981-157; Rev.Rul. 71-179; Rev.Rul. 71-268]
3. To claim an interest deduction it is necessary to be liable on the note. However, Treas.Regs. section 1.163-1(b) states that “Interest paid by the taxpayer on a mortgage upon real estate of which he is the legal or equitable owner, even though the taxpayer is not directly liable upon the bond or note secured by such mortgage, may be deducted as interest on his indebtedness.”
4. Deductions need not be allocated in accordance with whom the Form 1098 reports as the payor.

The CCA applied these principles to three factual situations. Since the conclusions simply apply the foregoing principles without adding to them, I am not going to summarize them. Interested readers can read them directly.

CCA 201451027, December 19, 2014