Article Highlights:
- Equitable Ownership
- Who Qualifies as an Equitable Owner?
- Tax Implications of Being an Equitable Owner
- Mortgage Interest Deduction
- Property Tax Deduction
- Examples of Equitable Ownership
- Examples Where Taxpayers Were Not Equitable Owners
Equitable ownership refers to the situation where an individual possesses the benefits and burdens of ownership of a property, even though they do not hold the legal title. This concept is rooted in equity law, which aims to achieve fairness and justice. Equitable ownership is often contrasted with legal ownership, where the legal title is held by an individual or entity.
In essence, an equitable owner has a beneficial interest in the property, which means they enjoy the advantages of ownership, such as the right to use the property, receive income from it, and bear the responsibilities associated with it, like maintenance and taxes. However, they do not have the formal legal title, which is typically held by another party.
Who Qualifies as an Equitable Owner? – To determine whether an individual qualifies as an equitable owner, several factors are considered. The Tax Court has outlined specific criteria to assess whether a taxpayer possesses the benefits and burdens of ownership. These criteria include:
- Right to Possess and Use the Property: The individual must have the right to possess the property and enjoy its use, rents, or profits.
- Duty to Maintain the Property: The individual must be responsible for maintaining the property, including repairs and upkeep.
- Responsibility for Insuring the Property: The individual must be responsible for insuring the property against risks such as damage or loss.
- Bearing the Property’s Risk of Loss: The individual must bear the risk of loss associated with the property, such as damage or depreciation.
- Obligation to Pay Property Taxes and Assessments: The individual must be obligated to pay property taxes, assessments, or other charges related to the property.
- Right to Improve the Property: The individual must have the right to make improvements to the property without the owner’s consent.
- Right to Obtain Legal Title: The individual must have the right to obtain legal title to the property at any time by paying the balance of the purchase price.
These criteria help establish whether an individual has a sufficient level of control and responsibility over the property to be considered an equitable owner.
Tax Implications of Being an Equitable Owner – Equitable ownership has significant tax implications, particularly concerning the deductibility of mortgage interest and property taxes. By establishing equitable ownership, individuals can benefit from tax deductions that would otherwise be unavailable if they were not considered owners. The Internal Revenue Service (IRS) allows taxpayers to deduct mortgage interest and property taxes if they are considered the equitable owners of the property, in part as the result of tax court cases.
- Mortgage Interest Deduction – Under IRS regulations, a taxpayer may deduct home mortgage interest if they paid interest on a mortgage for real estate of which they are the legal or equitable owner. This means that even if an individual is not directly liable on the mortgage, they can still deduct the interest if they meet the criteria for equitable ownership.
- Property Tax Deduction – Like the mortgage interest deduction, equitable owners can also deduct property taxes they pay on the property. The key factor is whether the individual bears the responsibility for paying the property taxes.
Examples of Equitable Ownership
- Binding Purchase Contract and Occupancy Agreement: In the Tax Court case of Uslu, Saffet (TC Memo 1997-551), the taxpayer entered into a binding contract to purchase a residence and took possession of the property under an “occupancy agreement” while financing was pending. The occupancy agreement made the taxpayer responsible for utility payments and obtaining liability and contents insurance. After a two-month transition period, the taxpayer was also liable for repairs to plumbing, heating, cooling, electrical equipment, and appliances. The Tax Court determined that these responsibilities shifted sufficient burdens and benefits of ownership to the taxpayer, making them an equitable owner and eligible to deduct the mortgage interest.
- Living on the Property and Covering Expenses: In the case of Njenge, Ndile G. (TC Summary Opinion 2008-84), the taxpayer’s son was the legal owner of the property, but he did not reside there. The taxpayer lived on the property and covered all expenses and taxes. When the property became rental property, the taxpayer, not the son, served as the landlord, finding a tenant and providing all related services. The Tax Court concluded that the taxpayer held the burden and benefit of ownership exclusively, making them the equitable owner and eligible to deduct the property taxes.
- Contributing to Down Payment and Mortgage Payments: In the case of Edosada, Conrad (TC Summary Opinion 2012-17), neither the title to the property nor the mortgage obligation was in the taxpayer’s name. However, the taxpayer resided at the property, contributed a significant part of the down payment, and agreed to be responsible for all mortgage payments. The Tax Court concluded that these actions made the taxpayer an equitable owner.
Examples Where Taxpayers Were Not Equitable Owners
- No Beneficial Interest in the Property: In the case of Daya, Gabriel (TC Memo 2000-360), the taxpayers’ sons lived with their parents in a residence owned jointly by their father and uncle. The sons did not contribute to the down payment, did not make any payments for the residence for the preceding 12 years, and did not have any agreement giving them an ownership interest. The Tax Court determined that the sons did not hold a beneficial interest in the property and were not equitable owners.
- No Right to Possession or Use of the Property: In the case of Puentes, Lourdes (TC Memo 2013-277), the taxpayer assumed no benefit or burden of ownership on a home legally owned by her brother. Although she made mortgage payments to help her brother, she could not establish that she had any right to possession or use of the property or any obligations for its maintenance. The Tax Court concluded that the taxpayer was not an equitable owner.
Equitable ownership is a crucial concept in property law and tax planning, allowing individuals to claim tax deductions for mortgage interest and property taxes even if they do not hold the legal title. By meeting specific criteria, such as the right to possess and use the property, responsibility for maintenance and insurance, and bearing the risk of loss, individuals can establish themselves as equitable owners.
Understanding equitable ownership and its tax implications can help taxpayers make informed decisions about property ownership and maximize their tax benefits. Whether entering into a binding purchase contract, covering property expenses, or contributing to mortgage payments, establishing equitable ownership can provide substantial tax advantages.
Please contact this office if you have questions related to equitable ownership.
If you have any questions, please contact our office at (503) 224-5321. Isler Northwest LLC is a firm of business advisors and CPAs in Portland, Oregon. Our service goal at Isler Northwest is to earn our clients’ trust as their primary business and financial advisor.
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