Understanding Joint Home Ownership and Its Tax Implications

Home ownership comes with a variety of tax benefits, including deductions for mortgage interest, property taxes, and even credits for energy-efficient home improvements. But what happens when you share ownership of a home with a spouse, partner, or roommate? Joint home ownership can make home ownership more financially accessible, but it also introduces complexities when it comes to tax deductions and credits. In this blog, we’ll explore how joint home ownership affects your taxes and how you can maximize your tax benefits.

How Does Joint Home Ownership Affect Your Taxes?

When you co-own a property, each owner is entitled to claim a share of the related tax deductions and credits on their tax returns. The division of these deductions and credits depends on several factors, including how the property is held, who paid the expenses, and your tax filing status.

Paying Expenses From a Joint Account

If you and your co-owner pay expenses from a joint account, the IRS generally requires you to split your deductions for property taxes and mortgage interest equally, assuming you decide to itemize deductions and file separate tax returns. Property tax and other state and local taxes are deductible up to a combined maximum of $10,000. Additionally, interest on the first $750,000 in mortgage debt ($375,000 if you’re married filing separately) is deductible. This limit applies per taxpayer if you and your co-owner are not married.

Splitting Mortgage Interest With a Single 1098

If your lender reports your mortgage interest on a single Form 1098, which often lists only one borrower, you can still split the mortgage interest deduction. The person listed on the 1098 should report their share of the interest on their tax return using the 1098 as backup. The other co-owner(s) can report their share of the mortgage interest on Schedule A, line 8b, and attach a note detailing the interest paid, along with the name, Social Security number, and address of their co-owner, and/or a copy of the 1098.

What if You Don’t Own the Property Equally?

If you co-own your home as joint tenants or are married in a community property state, each partner owns an equal share. However, co-owners who hold title as tenants in common may own unequal shares in a home. For example, one partner may own 80% of the property while the other owns 20%. Unless your tenants-in-common agreement states otherwise, you may divide your deductions according to your stake in the property and how much of the expense you’ve paid. If you own 80% of your home and pay 80% of the mortgage, you should deduct 80% of the interest.

The IRS is primarily concerned with ensuring that you’ve split deductible expenses accurately. The total amount of interest you and your co-owner(s) deduct should not exceed the total amount reported on your 1098. Similarly, your property tax deductions should not exceed the amount of property tax paid.

To further document to the IRS that you paid your share of the expenses, it may be helpful for all parties to pay their share of deduction-related expenses from their individual accounts directly to the lender or tax assessor, rather than reimbursing their co-owner. Also, track your individual expenses if you make home improvements that qualify for residential energy tax credits. You may each file Form 5695 to report your individual expenses and calculate your credit.

How Does Tax Filing Status Factor In?

If you’re married and filing a joint tax return, you don’t have to divide deductions and credits: Your income, expenses, deductions, and credits are all accounted for on a single tax return. However, married couples filing separately should consider the following:

• Both must choose to itemize or take the standard deduction. No mixing and matching allowed.
• Mortgage interest is only deductible for the first $375,000 of debt per spouse.
• Mortgage interest is deductible for the person who paid it. If you paid the whole mortgage from an individual account, you get 100% of the deduction. If the mortgage is paid from a joint account, each spouse typically deducts 50%.

It’s a good idea for all co-owners—married or unmarried—to keep records that show how they’ve divided deductions or credits. This ensures each person can report their share accurately on their tax return and explain their methodology to the IRS if needed.

The Bottom Line

Splitting deductions and credits with a co-owner can add a layer of complexity to your taxes, particularly when you’re filing separate returns. If you have questions about how you should share deductions and credits, consider working with a tax advisor. They can help you figure out how to split deductions fairly and may have valuable insight on how to lower your tax bill in the process.

At O1ne Mortgage, we understand that navigating the complexities of home ownership and taxes can be challenging. That’s why we’re here to help. Whether you’re looking to buy a new home or refinance your current mortgage, our team of experts is ready to assist you. Call us today at 213-732-3074 for any mortgage service needs. Let us help you make the most of your home ownership journey.