No Mortgage Deduction If Debt Isn’t Recorded

Generally speaking, “qualified residence interest” paid during a year on “acquisition indebtedness” or “home equity indebtedness” is deductible (within limitations).  A recent Tax Court decision (Christopher DeFrancis, et al v. Commissioner) brings home the importance of paying close attention to the definitions of these tax terms.

In this case, the taxpayers borrowed from a relative, signed a “mortgage note,” and another document entitled “mortgage,” but did not actually record the documents with county authorities.

The IRC section 163 Regulations require that acquisition indebtedness not only be incurred in buying or building one’s residence, but also that the property be made security for payment of the debt, and that such debt be “recorded, where permitted, or (be) otherwise perfected in accordance with applicable State law.”

This mortgage was not recorded, and the Court further concluded that the taxpayers did not establish that the mortgage was otherwise perfected under Massachusetts law.

“In Massachusetts, an unrecorded mortgage is invalid as against third parties who do not have actual notice of it,” said the Court.

So, bottom line:  unrecorded mortgage = no tax deduction.