The IRS has won one against folks who are dating and living together. A couple in Massachusetts were dating. She moved into his house that he had purchased by himself. They agreed to share in the expenses of the household, including the mortgage. They improved the house together and agreed to share in any profits from the house if they sold it. They had a child together. He stopped working and became the primary caregiver for their child. So she was paying the mortgage and household expenses by herself. Common enough story, so let’s look at how they filed their taxes.
For several years, she did not ask to be an owner in the home. He claimed the entire home mortgage interest deduction on his tax return. Some time after she started paying all the expenses, they agreed to become joint owners of the home. It took them several months to get the paperwork filed and she became an owner in June of 2007. She claimed the home mortgage interest deduction for the whole year.
The IRS audited her return. They disallowed the interest deduction for the time that she was not listed as an owner of the residence. Their argument was that she did not have the obligation to pay the mortgage nor the risks associated with home ownership prior to June, so she was not entitled to the mortgage interest deduction for that part of the year. The IRS won.
To me, this case highlights the disparity between the law and equality. I can’t change the law (at least not very easily), but I can point out that agreements between two people that make economic sense do not always produce equitable results from a tax perspective. The result would have been different if the couple was married because they would have filed a tax return as married filing jointly. The result would have been different if she had become an owner in the house as soon as she started paying part of the mortgage.
The moral of the story (if there is one) – Living together doesn’t always get you the benefits you think you deserve.