In a case of first impressions decided last year, the Ninth U.S. Circuit Court narrowly ruled the limits for mortgage interest deductions apply on a per-taxpayer basis, effectively allowing an unmarried couple to “double up” on their write-offs. Initially, the IRS intended to contest the decision, but now it has thrown up the white flag by issuing a formal acquiescence (AOD 2016-31, 8/1/16).
Normally, you can deduct the full amount of mortgage interest you’re required to pay on your principal residence and one other home such as a vacation home. But sometimes you might bump up against these two tax law limits, especially if you’re a homeowner in affluent area.
- Acquisition debt: You may deduct mortgage interest paid on “acquisition debt” used to “buy, build or substantially renovate” a home if the loan is secured by a qualified residence. But the total principal amount of your acquisition debt can’t exceed $1 million.
- Home equity debt: When permitted by state law, you also may deduct the interest on home equity loans secured by a qualified residence. The limit for home equity debt is $100,000. Also, these amounts can’t exceed your equity in the residence (i.e., the home’s value minus other loans).
As a result, a married couple filing jointly or a single filer can write off mortgage interest on a combined total of $1.1 million of debt.
In the Ninth Circuit Court case, two unmarried domestic partners bought homes in Beverly Hills and Rancho Mirage, California as joint tenants. They financed each purchase with a mortgage and took out a home equity line of credit on one home. Both homes qualified for mortgage interest deductions.
The IRS said that the couple was limited to a combined interest deduction on $1 million of acquisition debt and $100,000 of home equity debt. In other words, the tax law limits apply to the residences, not the taxpayers. And the Tax Court went along with the IRS.
But the Ninth Circuit disagreed. After examining legislative intent, the Court ruled that the limits apply separately to each taxpayer. After all, taxpayers have tax years – residences don’t (Voss, CA-9, 8/7/15). Bottom line: An unmarried couple could collectively write off interest on a total of $2.2 million of debt if they otherwise qualify under the rules.
The IRS’ acquiescence unlocks the door for other joint tenants in comparable situations residing outside the boundaries of the Ninth Circuit. Some tax commentators have called for codification of this interpretation. Conversely, the outcome effectively adds another layer to the “marriage penalty” for certain couples.
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Tags: Income Taxes
