June 2, 2015
To claim a mortgage interest deduction, taxpayers must provide certain key information to the IRS.
Is the claimed deduction for mortgage interest on a qualified residence? If so, is the taxpayer liable to pay the interest? Can the taxpayer substantiate legal ownership of the real property? Did the taxpayer actually pay the interest and provide evidence of having paid it?
In a recent case (Saad Al-Soufi and Samia Schreitah v. Commissioner, T.C. Memo 2015-68, 109 T.C.M. 1371, April 7, 2015), a married couple’s inadequate answers to these types of questions caused the Tax Court to disallow their claim for a mortgage interest deduction.
Saad Al-Soufi and his wife Samia Schreitah purchased property in Syria in January 2009, intending to use the property as a summer home. The property allegedly had a mortgage on it.
The mortgage holder was HARN Mortgage, a privately owned limited partnership that provided mortgages to qualified individuals. HARN Mortgage was located in Syria.
Al-Soufi testified that he was the obligor on the mortgage note but that his sister actually made the mortgage payments. He claimed that his sister gave various gifts to the mortgage company, which the company accepted as payment of the monthly mortgage payments.
Al-Soufi also asserted that he paid $73,619 in mortgage interest in 2010. HARN Mortgage did not provide Al-Soufi with a contemporaneous document stating the amount of mortgage interest paid during 2010.
Al-Soufi created his own amortization schedule, which he used in preparing the 2010 tax return. It is from this amortization schedule that the amount of mortgage interest expense of $73,619 was calculated.
After reviewing the return, the IRS sent Al-Soufi and Schreitah a notice of deficiency disallowing the mortgage interest deduction of $73,691.
The couple was unable to provide the Tax Court with proper documentation, such as a certificate of title to the property, a copy of the mortgage note or a loan amortization schedule. Al-Soufi claimed that, because civil war broke out in Syria in 2011, all of his documentation was destroyed.
During the trial, Al-Soufi stated that HARN Mortgage was out of business.
The first issue in this case was whether the interest was qualified residence interest. While personal interest is not deductible, qualified residence interest is an exception to this rule.
The problem is that Al-Soufi was not able to prove that a mortgage note existed or that he was the mortgage note holder. To deduct interest, a taxpayer must generally be personally liable to pay it. Al-Soufi was unable to prove that he was.
The second issue was whether Al-Soufi and his wife were the legal or equitable owners of the property. Interest paid by taxpayers on a mortgage on real estate of which they are the legal or equitable owners may be deducted as interest. However, they were unable to produce a certificate of title or any other documentary evidence that they owned the property.
The third issue was that the taxpayers were unable to establish that interest was actually paid on a mortgage note. Al-Soufi could not provide the court with any evidence of payment, such as a canceled check. He claimed his sister had made the payments to the mortgage company by giving the company various gifts on his behalf, but he was unable to document or prove this claim.
The court concluded that Al-Soufi had produced no credible evidence that he owned the property during 2010 or that it was a “qualified residence” during that year. He failed to prove that interest was paid on a mortgage loan secured by a property or that he and his wife had paid any interest that was paid. The court therefore had no choice but to disallow the mortgage interest deduction.
This article was originally posted on June 2, 2015 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at firstname.lastname@example.org.