Unmarried taxpayers who co-own a home received a gift from the IRS recently when it acquiesced in the Ninth Circuit’s decision, concluding that the mortgage interest limitation applies on a “per-taxpayer” basis, rather than on a “per-residence” basis. Typically, the maximum mortgage amount you can claim interest on is $1 million on first or second homes. You can also deduct interest on $100,000 for a second mortgage, regardless of how you use the proceeds.
The decision stemmed from a Tax Court decision in Sophy, 138 T.C. 2014 (2012). In that case, an unmarried couple owned two homes, one in Rancho Mirage, CA, and the other in Beverly Hills, CA. In 2006 and 2007, the combined balances of the mortgages on the two homes totaled more than $2 million. In filing their 2006 and 2007 returns, the taxpayers each took advantage of the $1.1 million limitation instead of applying it to each residence. The IRS audited their returns and disallowed portions of their mortgage interest deductions, asserting that the limitation applied on a “per residence” basis. The taxpayers disagreed, and appealed to the Tax Court.
In 2012, the Tax Court decided for the IRS, interpreting the language in the statute to reduce the mortgage interest limitation to $550,000 for married individuals filing separate returns should also apply to unmarried co-owners and that Congress was “residence focused” in drafting the statute.
However, the Ninth Circuit of Appeals reversed the decision in Voss v. Commissioner, 796 F.3d 1051 (9th Cir. 2015), and allowed each taxpayer to use the full $1.1 million limit. In August of 2016, the IRS announced in an “Action on Decision,” that it is acquiescing to the decision, and will allow taxpayers to deduct interest up to the full $1.1 million limit, even if another taxpayer has debt on the same property.