An interesting tax ruling having to do with bankruptcy was talked about in a recent tax information newsletter (see www.sapursteincpas.com). Of course, as an Indiana consumer bankruptcy specialist who deals in foreclosures and debt, I found this story especially informative.
A couple had filed for bankruptcy recently enough to prevent them from qualifying for a mortgage. Their son decided he would buy a home for his parents, and so he took out a mortgage based on his own credit record. The parents were the only ones living in the home. In fact, it was the parents who made all the mortgage payments and who took care of all the taxes and all the maintenance expenses.
The tax question that arose and was finally referred to tax court was: Who gets to deduct the mortgage interest on their taxes – the son or the parents? The court ruled that, even though the son was the actual owner of the home, the parents were the “equitable owners”, the ones getting the benefit of living there. The court considered the fact that the parents are taking responsibility of ownership, paying for taxes and upkeep. Even though the parents are not liable for the mortgage, the court ruled that they could take the tax deduction for the interest portion of the payments.
One aspect of this story that I want to emphasize to readers is that each bankruptcy situation is different. In this case, it appears, family members cooperated, working together to devise a plan that would work for them (rather than casting blame on each other, as unfortunately often happens in bankruptcy situations). Apparently, too, the son and parents sought professional help to get a ruling in their special circumstances. Both these steps (cooperation and support among family members and seeking professional advice) can prove extraordinarily beneficial in any bankruptcy situation. As I say in many of my bankruptcy blog posts: Get help. Devise a plan. Work the plan.