There are several tax deductions related to co-owned property. For those who are eligible, taking advantage of these deductions can significantly reduce tax liability.

An interest expense deduction is available only to those who are primarily liable on an underlying debt. However, when two or more persons are jointly and severally liable for a debt, each is primarily liable for the debt; each is entitled to a deduction for the interest on that debt that he/she pays. When co-signers make a gift to another co-signer who paid the interest, this has no effect on the rule.

A father was allowed to deduct the interest he paid on a note that he co-signed with his son as evidence of a student loan to the son for tuition, fees, etc. (Rev Rul 71-179, 1971-1 CB 58).

A father was allowed to deduct mortgage interest paid on property held in common with his daughter.  It didn’t matter that he had temporarily conveyed legal title to his daughter to avoid creditors’ claims (Conroy, Thomas, (1958) TC Memo 1958-6).

Where mortgaged property is owned jointly, and joint owners are jointly liable on the mortgage, each owner is entitled to a deduction for the mortgage interest he/she actually pays out of his own funds.

However, when there isn’t joint liability on the mortgage or where there is right to reimbursement, and one joint owner pays all or part of the mortgage interest, the deductibility is the same as under the rules for taxes (see below).

Are a joint tenant’s monthly payments of a mortgage debt on property held jointly regarded as gifts to the other joint tenants?

FACTS: An individual provided funds for the down payment for a purchase of real property and then conveyed two-thirds of the property to his two children; the property was held in joint tenancy. The individual subsequently made payments on the mortgage without expecting reimbursement from the children.

FINDING: Transfer of the property was termed a gift to each child--after the transfer, the taxpayer and each of the children held a one-third interest in the property. The subsequent mortgage payments were also considered monthly gifts to each child, each equal to one-third of the mortgage payment. (Rev Rul 78-362, 1978-2 CB 248)

What are the consequences when an individual acquires a one-half equitable interest in a residence by agreeing to assume the co-owner’s indebtedness to the lender?

FACTS: A taxpayer’s sister bought a home that she financed with a mortgage. She then agreed to sell one-half of the property to the taxpayer in return for the taxpayer paying the mortgage. The taxpayer made the mortgage payments but didn’t disclose his ownership or become directly obligated to the mortgagee (he didn’t want to incur the fees required for refinancing). However, an unrecorded quitclaim was made on the property.

FINDING: The taxpayer had an enforceable, interest-bearing debt to his sister. His payments to the mortgagee were, in effect, payments to his sister. Taxpayer gets an interest deduction for his payments. (Amundson, Brent, (1990) TC Memo 1990-337)