Tax Benefits: Home Mortgage Interest Deduction for Unmarried Couples

The Ninth U.S. Circuit Court of Appeals recently ruled that unmarried individuals who purchased a home together are eligible to a home mortgage interest deduction for up to $1.1 million in debt each. This decision reversed a previous tax court decision that stated unmarried individuals were subject to the same $1.1 million limitation as married couples, thus splitting the deduction to $550,000 each.

home mortgage interest deductionThe home mortgage interest deduction guidelines

In previous decisions, the tax court and the IRS held that Sec.162(h)(3) applied to any two individuals that owned a home together, even if they did not jointly file tax returns. This home mortgage interest deduction threshold applies to mortgage interest up to $1 million in home-acquisition debt and up to $100,000 in home-equity debt on a qualified residence. The IRS deems a qualified residence as either a primary home or a residence in addition to a primary residence.

The way this works is that the $1.1 million home mortgage interest deduction applies strictly to an individual taxpayer. However, married couples file jointly, which provides them with treatment as an individual taxpayer by the IRS. So under Sec.162(h)(3), a married couple can only deduct their mortgage interest up to the $1.1 million total of the debt limit.

The point of contention 

The court argued that Sec.162(h)(3) did not specifically state how the debt limit applied to unmarried individuals who own a residence together. Similarly, the court stated that the code also did not clearly define whether the $1.1 million deduction limit for unmarried co-owners is applicable for a qualified residence, regardless of the number of owners. Therefore, there is no distinction drawn as to whether the limit of the debt can be claimed by any individual taxpayer.

The court also cited the fact that the IRS did not determine how the debt limit applied to unmarried co-owners of a property until it issued a chief counsel advisory in 2009. With this advisory, the IRS ruled that the debt limit applied on a per-residence basis, and not a per-taxpayer basis. However, the court deemed that a chief counsel advisory was not an authority, thus the debt limit has no clear designation for unmarried co-owners.

The case

The case involved Bruce Voss and Charles Sophy, co-owners of a property who each claimed a home mortgage interest deduction of $1.1 million under Section 163(h)(3). However, the IRS split the deduction between Voss and Sophy at $550,000 each because they co-owned the property, thereby significantly limiting the amount of their deductions.

The decision

The court reversed the tax court decision, finding the mortgage debt limit provision in the tax code applies on a per-taxpayer basis except in the case of married individuals.  This makes each member of the couple eligible to the homeowner mortgage interest deduction for up to the $1.1 million limit.

Following the decision, the IRS is still eligible to suspend these cases and not issue refunds for amended returns filed while the statute of limitations remains open. Further, if refunds are issued, the IRS may seek to recover these funds if the Supreme Court reverses this decision in the future.

Frank Brunetti has been practicing law for over thirty years in the areas of estate and wealth preservation, tax planning for business entities and complex tax matters. He is admitted to the New Jersey and New York Bars as well as the United States Tax Court. Mr. Brunetti provides representation in federal and state tax matters, IRS controversies, estate and business planning and guidance for the preparation of wills and trusts as well as the administration of estates. For more information, please visit Frank Brunetti's full biography at Scarinci Hollenbeck

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