Is mortgage interest deductible?
As we slip closer and closer to the big “R”, a recession, we must look a bit deeper on what mortgage interest might or worse what mortgage interest will NOT be able to be deducted. Here is a good case in point, Ronald W. Howland, Jr. and Marilee R. Howland v. Commissioner, T.C. Memo 2022-60 that was presided over by the Honorable Judge Weiler. For the year in question the Howlands claimed $103,498 of mortgage interest paid, although no Form 1098 was ever produced by the lienholder.
The basics of this case is that in 2007 the Howlands took out an equity loan as a second trust deed on their personal residence in Florida. In this trust deed, all payments were to be applied to interest and any overage would then be applied to principal.
The Howland’s home was eventually foreclosed on and the total proceeds were not enough to cover both the first and second trust deeds and the accrued mortgage. So, the question then is, how much of the received amount is repayment of principal and how much is interest?
There were a number of other U.S. Tax Court cases that were also cited but at the end of the day the Judge noted that there was no evidence of how the funds of the sale should be allocated nor was a Form 1098 issued and therefore felt that Mr. and Mrs. Howland did not meet their burden of proof and ruled that the itemized deduction should not have been taken.
The lesson learned here is that if you have a foreclosure or a short sale, make sure that it is EXPLICITLY spelled out how much should be applied to interest and how much should be applied to principal or you, too, could find yourself in the U.S. Tax Court fighting the battle the Howlands fought and you can expect to get the same result.