Q: More often than ever before, unrelated singles are qualifying for and buying homes, which is a major hedge against the inflation spiral. Earlier this year, a close friends of mine and I bought a home in joint tenancy. Our respective incomes are $11,500 and $22,000. The amortization schedule furnished by the mortgage company indicates that in 1977 we will pay approximately $4,650,00 in interest. My question is whether it would not be more advantageous to split this amount in some way when tax time comes around to maximize the tax benefit from the interest payments or whether the one with the highest income should declare the interest as a deduction?
A: Several months ago, I made some suggestions for single people taking property with others. At the time, I wrote that there are three basic ways in which title can be held with another person. Tenants by the entirety is reserved for a husband and wife, and under such an arrangement, both parties own the property jointly, with a right of survivorship. If one of the parties dies, the other automatically owns the entire property, without the necessity of having to go through the probate court.
A second method of joint ownership is joint tenants with right of survivorship. The elements of this interest are similar to those of a tenancy by the entirely, only the parties are not married. If one joint tenant dies, the other will receive the property automatically. Both own the property together.
The third type of ownership is where the parties hold property as tenants in common. Here, each has a divisible interest in the property, to the extent of their ownership. It can can be split equally, or one person can own a larger percentage than the other. If you and your friend would have taken as tenants in common, each of you would be able to use your interest in the property as you saw fit, so long as you do not disturb the other's interest. You could even sell or mortgage your interest in the property, if you were so inclined.
Before answering the tax question you posed, I must point out my concerns about single people taking title as joint tenants. If one of you dies, the other automatically gets the property. Regardless of what you put in your will, the law will require that result. Thus, it is conceivable that if you die shortly thereafter, you investment in the property will be lost to the estate of your friend.
For this reason, I have always recommended that single people take property as tenants in common. You both should enter into a partnership agreement spelling out your respective rights and responsibilities while you are living and own the property. Additionally, it is important to prepare a will, to cover and protect your interest in the property in the event you die. And it's not too late to change the legal form of ownership into a tenants in common arrangement.
Turning to the tax question, although the deducation for in interest and real estate taxes would clearly give the greatest tax benefit to the higher-income partner, our friends at the Internal Revenue Service will not allow a taxpayer to arbitrarily assign the interest and the real estate tax deduction.
Unfortunately, the law allows a deduction for interest and real estate taxes to the person who pays the interest. Since both of you are joint owners of property, you both are entitled to deduct the interest and real estate taxes that you actually paid during the year. While it is possible for one of you to pay all the taxes and mortgage payments, I doubt that both of you would be agreeable to that form of arrangement. After all, while you certainly will get the benefits of the deductions, in the final analysis someone has to make the mortgage payments.
The Internal Revenue Service has a very helpful publication entitled "Tax Information for Homeowners" (Publication 530, 1977). I suggest you contact your local IRS office to obtain a copy.
Benny L. Kass is a Washington attorney. Write him in care of the Real Estate section. The Washington Post, 1150 15th St. NW, 20071.