[WSBAPT] probate question - single spouse on mortgage
Martin Silver
msilver at wolfenet.com
Wed May 27 07:18:42 PDT 2015
To be honest I have only glanced at this chain, but if y’all were talking in part about a deduction by one not on the mortgage, and possibly not in legal title either, I know that Reg 1.163-1 (b) has been litigated and I just ripped these two Tax Court citations off of someone’s website. There is likely to be a problem if there is a difference between the SSN on a bank 1096 and on a tax return which takes the deduction, so documentation should be lined up for when the IRS cranks out a letter asking for an explanation of the deduction. I have not gone to the source and verified the quoted material however.
In 1997 the Internal Revenue Service ("I.R.S.") sought to contest the deductibility of interest paid on a mortgage because the taxpayer had no legal obligation on the debt. Uslu v. C.I.R. , 1997 WL 770235 (U.S.Tax Ct.) (U.S.Tax Ct.,1997) The Court found that because the taxpayers were equitable owners and had shown they were liable to the debtors of the mortgage to pay the mortgage they were entitled to the deduction of the interest.
"The Court is satisfied, from all the evidence presented, that petitioners have continuously treated the Alisal property as if they were the owners, and that they, exclusively, held the benefits and burdens of ownership thereof. On this record, the Court holds that petitioners established equitable and beneficial ownership of the Alisal property, and that they were liable to Haluk and Aysun in respect of the mortgage indebtedness. As such, the Court holds that petitioners are entitled to a deduction for the $18,980 home mortgage interest paid by them during 1992." Uslu v. C.I.R., 1997 WL 770235, 5 (U.S.Tax Ct.) (U.S.Tax Ct.,1997).
In a 2002 case, Hackley v. C.I.R. L 1825348, (U.S.Tax Ct.,2002), the Court upheld the criteria established in Uslu of the two critical factors by specifically denying the deduction to the taxpayer, Hackley. The taxpayer failed to establish his equitable ownership of the property. Hackley v. C.I.R. L 1825348, 3 -4 (U.S.Tax Ct.,2002)
”In the instant case, the record establishes that during the years in issue Ms. Orum, and not petitioner, was (1) the legal owner of the LA property and (2) indebted to Countrywide on the mortgage loan it had made on the property. Although we find that petitioner may have made mortgage payments, real estate tax payments, and insurance premium payments for the LA residence, there is no objective evidence to persuade us that he had equitable ownership of the LA residence during the years in issue. The record lacks sufficient evidence, most notably Ms. Orum's testimony, of the purported arrangement with petitioner. Further, petitioner testified that Ms. Orum made no deposits into their joint checking account, where all mortgage, insurance, and real estate tax payments were made. His testimony, without more, is insufficient. See Loria v. Commissioner, T.C. Memo.1995-420 (taxpayer's attempt to establish equitable ownership with his sole testimony is insufficient).
Based upon our examination of the entire record in this case, we find that petitioner failed to establish that he was the equitable owner of the LA property during the years in issue, or that he is entitled to deduct for those years the mortgage loan interest he paid on that property. We therefore sustain respondent's determination disallowing the mortgage loan interest deductions that petitioner claimed on his 1995 and 1996 returns.” Hackley v. C.I.R., L 1825348, 3 -4 (U.S.Tax Ct.,2002)
From: Paul H. Grant
Sent: Wednesday, May 27, 2015 6:33 AM
To: WSBA Probate & Trust Listserv
Subject: Re: [WSBAPT] probate question - single spouse on mortgage
I disagree that it is as simple as the mortgage payor can take the deduction. Someone must be an owner or equitable owner. Look at CFR 1.163-1(b)
Sent from my iPhone ~ Paul H. Grant
On May 26, 2015, at 12:25 PM, H Henson <hhensoncpa at gmail.com> wrote:
Marcia,
if your client is paying the mortgage, your client should be able to claim the deduction. I've dealt with several instances where the tax reporting (1099, 1098, etc) was in the name of another person, etc., but was paid by someone else. In general, whoever was paying was able to take the deduction.
but it depends on the facts and circumstances. Clunky? possibly, yes.
Will it require responding to IRS letters? most likely; In my experience, most letters sent with returns are ignored. letters sent in response to IRS letters actually get read. You are on the right track to claim the deduction for your client.
To Tom's point - if the property is characterized as a rental / investment property, there is a different method to report; or it could alternately be claimed as an interest deduction related to a second property. Depends on the client's situation.
Holly Henson, CPA
Attorney at law
PO Box 1555
Bellevue, WA 98009
fax/phone (206) 203-3259
On Tue, May 26, 2015 at 9:28 AM, Tom J. Westbrook <tjw at w3net.net> wrote:
Hi Marcia,
As always, Heather has great comments and advice re: the lender.
On the interest rates, if the brother isn’t living in the home, then it is not his personal residence. Check with a CPA, but it is my understanding there are differences in how interest is handled between residential property and commercial property from a tax reporting standpoint if the brother is using the home as a rental. Active versus passive loss rules will likely be involved as well. I can’t cite you to the IRS section, but have had experience in the past where a CPA did advise that the heir could take the interest deduction as long as the heir is the one paying the payments. My recollection (which is sometimes questionable) was the CPA advised that someone is entitled to the interest deduction and if the heir is making the payments and has made a defacto assumption of the loan, then he/she should be entitled to take the deduction whether the lender will approve an actual assumption or not.
Regards,
Tom
From: wsbapt-bounces at lists.wsbarppt.com [mailto:wsbapt-bounces at lists.wsbarppt.com] On Behalf Of Marcia Mellinger
Sent: Monday, May 25, 2015 1:31 PM
To: WSBA Probate & Trust Listserv
Subject: Re: [WSBAPT] probate question - single spouse on mortgage
Dear Tom, To fill in some details--
My client is the surviving brother of the deceased, and the PR is the surviving wife. The property was purchased before their brief marriage, note and DOT signed only by the deceased. The surviving spouse has given up her interest in the property, so not interested in financing it. I have asked my client to check into refi options, but I think the rate was so low, he does not want to mess with it.
Hope someone has some ideas about reporting the mortgage interest deduction, and options for dealing with the creditor's claim from the lender. (I have not seen a mortgage lender file a creditor's claim before this).
Best, Marcia
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Date: Mon, 25 May 2015 12:40:51 -0700
From: tjw at w3net.net
To: wsbapt at lists.wsbarppt.com
Subject: Re: [WSBAPT] probate question - single spouse on mortgage
Marcia, your facts are pretty Spartan so hard to give a considered response.
Can your PR client get financing to pay off the loan?
Is the heir a spouse or other beneficiary?
If a spouse, is there anywhere in the loan documents that make the spouse responsible for any of the payments on the promissory note?
Sincerely,
Tom
Thomas J. Westbrook
Attorney at Law
<image001.jpg>
Rodgers, Kee & Card
324 West Bay Drive NW, Suite 201
Olympia, Washington 98502
Phone: 360-352-8311
Facsimile: 360-352-8501
Email: tjw at buddbaylaw.com
Skype: thomas.westbrook
www.buddbaylaw.com
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From: wsbapt-bounces at lists.wsbarppt.com [mailto:wsbapt-bounces at lists.wsbarppt.com] On Behalf Of Marcia Mellinger
Sent: Sunday, May 24, 2015 9:25 PM
To: WSBA Probate & Trust Listserv
Subject: Re: [WSBAPT] probate question - single spouse on mortgage
I am currently dealing with this and Garn-St Germain appears the lender may not assert its due on sale clause, but the lender also will not allow an assumption, so the interest deduction is not under the name of the inheritor. We are dealing with this through letters filed with return, etc, but it is kind of clunky.
Also the lender filed a creditor's claim in the probate and so the probate cannot be closed.
Don't know if anyone knows of any work arounds. Best, Marcia
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Date: Sun, 24 May 2015 15:06:28 -0700
From: tjw at w3net.net
To: wsbapt at lists.wsbarppt.com
Subject: Re: [WSBAPT] probate question - single spouse on mortgage
Hello Sharon,
My response is based upon my experience and is not intended to be a complete legal analysis of your client’s situation. Others may have a more detailed legal opinion. The starting point is as MK pointed out.
In my experience, as long as the lender (beneficiary) is getting paid they are happy and do nothing. If H wants to keep the house, then he can either continue to make payments or he can refinance if that is more beneficial for him based on interest rates today (and points and closing costs) versus whatever interest rate is on the loan now.
Whether you give probate notice to creditors to the lender or not is really immaterial since the deed of trust will remain in first position anyway as it is secured debt. In other words, you can’t get rid of the debt by giving them notice and hoping they don’t file a creditor’s claim; from a practical standpoint that really only applies to non-secured debt of the decedent or other secured debt that is not covered by any equity in the home and H is thinking about selling for less than the total secured debts owed – in that case the second or third position lender may elect to collect in a non-judicial proceeding. If you have given notice to them and they don’t file their creditor’s claim timely, then any subsequent attempt to collect may be time barred if it is only against the decedent’s estate. If H is also on the second or third debt (if there is additional secured debt), then any bar to a later claim by that lender will not arise as to his community portion of the debt since his estate is not part of the probate.
As a side note, if the home is “underwater” from an equity standpoint and H does not want to keep the home, then when H is appointed PR with Letters Testamentary, he can try to work out a short sale of deed in lieu with the lender and move out after that all is done. In that case, you should consider if it is advisable for H to sink additional funds into the loan payments or discontinue making loan payments since most of the payment is interest and not reducing principal very much. When and if that decision is made is fairly strategic and should be made based upon a number of considerations that are very dynamic depending upon the totality of circumstances that I won’t go into with this response.
Sincerely,
Tom
Thomas J. Westbrook
Attorney at Law
<image001.jpg>
Rodgers, Kee & Card
324 West Bay Drive NW, Suite 201
Olympia, Washington 98502
Phone: 360-352-8311
Facsimile: 360-352-8501
Email: tjw at buddbaylaw.com
Skype: thomas.westbrook
www.buddbaylaw.com
The information contained in this email and attachment(s) are for the exclusive use of the addressee(s) and may contain private, privileged and/or confidential information. If you are not the addressee, you are strictly prohibited from reading, photocopying, distributing or otherwise using this email or its contents in any way. If you have received this communication in error, please notify us immediately by telephone at 360-352-8311 or by e-mail to reception at buddbaylaw.com, and destroy the original message from your electronic files.
From: wsbapt-bounces at lists.wsbarppt.com [mailto:wsbapt-bounces at lists.wsbarppt.com] On Behalf Of Sharon Rutberg
Sent: Sunday, May 24, 2015 2:08 PM
To: 'WSBA Probate & Trust Listserv'
Subject: Re: [WSBAPT] probate question - single spouse on mortgage
Thank you – this is very helpful, and it makes sense. I wonder if anyone has seen any problems arise in practice.
Sharon C. Rutberg
Attorney at Law
1718 NW 56th Street, Suite 304
Seattle, WA 98107
Website: www.sharonrutberglaw.com
206-409-2604
email at sharonrutberglaw.com
Washington State Bar #47055
D.C. Bar #420576
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From: wsbapt-bounces at lists.wsbarppt.com [mailto:wsbapt-bounces at lists.wsbarppt.com] On Behalf Of MK Henderson
Sent: Sunday, May 24, 2015 11:50 AM
To: WSBA Probate & Trust Listserv
Subject: Re: [WSBAPT] probate question - single spouse on mortgage
Look at the Garn-St Germain Act following.
12 U.S. Code § 1701j–3 - Preemption of due-on-sale prohibitions
(d) Exemption of specified transfers or dispositions
With respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon—
(1) the creation of a lien or other encumbrance subordinate to the lender’s security instrument which does not relate to a transfer of rights of occupancy in the property;
(2) the creation of a purchase money security interest for household appliances;
(3) a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
(4) the granting of a leasehold interest of three years or less not containing an option to purchase;
(5) a transfer to a relative resulting from the death of a borrower;
(6) a transfer where the spouse or children of the borrower become an owner of the property;
(7) a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property;
(8) a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property; or
(9) any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.
Under 6 if the spouse takes by inheritance the spouse can continue paying on the note. There is a question in your scenario whether the couple own the home as joint with right of survivorship but if the spouse were to die then the transfer of the remaining spouse could continue to pay on the note.
On Sun, May 24, 2015 at 10:12 AM, Sharon Rutberg <email at sharonrutberglaw.com> wrote:
Hello, Listmates –
Anybody out there this holiday weekend?
Married couple owns a home as “husband and wife” on the deed, but mortgage is in wife’s name alone (she had the better credit). They want to know whether, if she dies, he can “just keep making payments” on the existing mortgage. That sounds doubtful to me, and I’d like to understand what will happen. If she dies, will notice have to go to the mortgage company as her creditor? Will the husband (as PR) have to pay off the mortgage using estate funds, or could he refinance it in his own name?
Thanks very much for your thoughts, and happy holiday.
Best,
Sharon
Sharon C. Rutberg
Attorney at Law
1718 NW 56th Street, Suite 304
Seattle, WA 98107
Website: www.sharonrutberglaw.com
206-409-2604
email at sharonrutberglaw.com
Washington State Bar #47055
D.C. Bar #420576
NOTICES
The contents of this message and any attachments may be protected by the attorney-client privilege, work product doctrine, and/or other applicable protections. If you are not the intended recipient or have received this message in error, please notify the sender and promptly delete the message. Thank you for your assistance.
IRS Circular 230 Disclaimer: To ensure compliance with requirements imposed by the IRS, we inform you that to the extent this communication contains advice relating to a Federal tax issue, it is not intended or written to be used, and it may not be used, for (i) the purpose of avoiding any penalties that may be imposed on you or any other person or entity under the Internal Revenue Code or (ii) promoting or marketing to another party any transaction or matter addressed herein.
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Mary K. Henderson
Henderson Law Office PLLC
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Renton, WA 98057
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