The information in this article is up to date through tax year 2019 (taxes filed in 2020).
Sometimes when a property is purchased, there are multiple people sharing ownership. When this happens there are generally two different structures for splitting up ownership: joint tenancy and tenancy in common.
Joint tenancy vs. tenancy in common
There are several factors that make these two different. The first is how ownership is distributed. Joint tenancy is an agreement where all parties own an equal share of the property. Tenancy in common agreements can outline separate percentages of ownership to different partners.
Another differentiating factor is what happens when an owner passes away. With joint tenancy, when an owner dies, his or her shares go to the other owners. But with tenancy in common, a deceased owner’s shares are passed down to their heir(s).
The last big difference is how ownership gets transferred. In a joint tenancy, no owner can transfer or sell their share of ownership without all other owners agreeing to it. In a tenancy in common, any owner can transfer their share of ownership at their leisure without anyone else’s approval.
Property taxes for shared ownership properties
The first thing to understand is that, from the perspective of the law, a property is one entity, even if it’s owned by multiple individuals. In other words, the government doesn’t care how you split up who pays how much of the taxes, only that they get paid.
All owners listed on the deed are responsible for the property taxes and failure to pay on time will negatively impact the credit scores of all owners listed. In a tenancy in common agreement, make sure to outline the breakdown of how taxes are distributed amongst owners.
Real estate tax deductions
The IRS gives certain tax breaks, or deductions, to property owners. Remember that the IRS also recognizes a property as a single entity and, therefore, deductions must reflect the ownership breakdown.
In other words, if a tenancy in common agreement for a given property states the three owners have 40%, 35% and 25% of ownership, they can only deduct that same percentage of property taxes paid. For example, Owner A can only deduct 40% of the property’s taxes paid. The only exception is if the tenancy in common agreement also specifically outlines a different breakdown in property tax responsibilities than the ownership portion.
Mortgage interest deductions
There are two main ways to list individuals on a mortgage and that determines what steps need to be taken in order to deduct the interest on those payments amongst owners.
The process is smoothest when a mortgage is taken out against one owner’s share of the ownership. That owner will then receive IRS form 1098 stating the interest paid. They will report that on their tax returns.
It’s less straightforward when there are multiple names on the mortgage or there are owners that aren’t listed on the mortgage. In either case, the first name on the mortgage is the individual recognized by the IRS as the one paying the mortgage interest. However other owners can still claim deductions for their portion by following a few additional steps.
First, the owner who received the 1098 files their Schedule A (IRS Form 1040), and populates line 8a, “Home mortgage interest and points reported to you on Form 1098.” Then, the other owners fill out the same form but populate field 8b, “Home mortgage interest not reported to you on Form 1098.” The other owners then attach a statement with the name, social security number and address of the owner who did receive the form 1098.