The IRS has announced its acquiescence in Voss, 2015-2 ustc ¶50,427 with regards to the mortgage deduction. The Ninth Circuit Court of Appeals, reversing the Tax Court, found that when multiple unmarried taxpayers co-own a qualifying residence, the debt limit provisions under Code Secs. 163(h)(3)(B)(ii) and (C)(ii) apply per taxpayer and not per residence.
What rule was in question here?
If a married couple owns a house and makes mortgage payments, they get a tax deduction for the interest portion of those payments, but only up to $1.1 million of debt. Once the mortgage exceeds $1.1 million, the mortgage interest deduction starts to phase out.
How was this situation different?
In the situation addressed by this court case, the taxpayers that co-owned the home were registered domestic partners, but they were not married.
The IRS said…
The IRS argued that it doesn’t matter that they were not legally married, they are still subject to the $1.1 million debt limit because it is per residence, not per taxapayer and therefore the interest payments on their mortgages (the balances of which totaled to $2.7 million) should be phased out.
The taxpayer said…
We’re not married, and we file separate tax returns, therefore we should each get to deduct interest on up to $1.1 million of debt without a phase-out, and when we split the $2.7 million of mortgage balance between us evenly, we each had total mortgage balances of $1.35 million each. Therefore, we should only have a small phase-out each (on each taxpayer’s portion in excess of $1.1 million, which is $0.25 million), not on the combined mortgage balance of $2.7 million, which is $1.6 million over the limit.
To which the court said…
Well, two different things. First, the Tax Court agreed with the IRS, disallowing a large portion of the taxpayers’ mortgage interest deduction. However, the Ninth Circuit Court of Appeals reversed the Tax Court’s decision, agreeing that the limit is, in fact, on a per taxpayer basis, not a per residence basis. The Court of Appeals said that because the statute expressly provides that that married individuals filing separate returns are each only entitled to 50% of the full limit ($550,000), Congress implied that unmarried co-owners filing separate returns are not subject to this limitation and are therefore entitled to deduct interest on up to $1.1 million of home debt, each.
What does this mean?
This is a win for taxpayers, although it is only relevant to unmarried individuals who co-own their residence and have an aggregate mortgage balance in excess of $1.1 million, but at the end of the day, it will mean a larger mortgage interest deduction for the people who fall in this category.