Category: Deductions & Credits
Subject: Interest Expense
Title: Gifted Mortgage Interest
IRC Sections: 163
Filename: 1151.html
Date Produced: 5/96

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Background
Parents gifted a home to their adult daughter. Parent paid, as a gift, some or all of the mortgage payments on the home. The daughter is liable for the mortgage payments.

Issue
Can the daughter deduct interest payments made on her behalf as a gift?

Answer
I do not believe the daughter is entitled to deduct the interest.

Discussion
As you have pointed out, it is well settled that the taxpayer claiming an interest deduction must be liable on the debt that gave rise to the interest. Also, it is well settled that payment of interest by a third party can be viewed as a gift, and in this set of circumstances almost undoubtedly should be so characterized.

It seems to me the ultimate issue is whether third-party payment of a taxpayer's obligation (as a gift or otherwise) is sufficient to support a deduction by the taxpayer. Like you, I cannot find any evidence that it does.

From a theoretical standpoint, I think no deduction should be based on a third-party payment as a gift. Every deduction we have is based on a diminution of the taxpayer's wealth, either through the taxpayer having made a payment or having incurred a liability to make a payment in the future. There is no diminution of the taxpayer's wealth in this case. I think that is fatal to you client's cause.