Mortgage Interest and Unmarried Co-Owners
Debt limits applied to per-residence basis, not per-taxpayer basis
Taxpayers can only deduct interest on qualified personal residence debt of $1 million ($500,000 for married filing separately) of acquisition debt plus $100,000 ($50,000 for married filing separately) of home equity debt.
In a recent Tax Court case, an unmarried couple who jointly owned their home argued that the $1 million and $100,000 limits applied separately to each of them, which would have allowed them together to deduct interest paid on up to $2.2 million of debt.
The Tax Court held that the home mortgage debt limits are applied on a per-residence basis, not on a per-taxpayer basis. The Tax Court relied on the definitions of “acquisition indebtedness” and “home equity indebtedness” in Code §163(h)(3)(B)(i) and §163(h)(3)(C) (i). These definitions indicate the debt must be related to a qualified residence, not to an individual taxpayer. The limits are on the total amount of acquisition or home equity debt of the qualified residence, not the amount that may be claimed by each taxpayer. Thus, the taxpayers, as unmarried co-owners, were collectively limited to a deduction for interest paid on a maximum of $1.1 million debt on the home.
Although this case did not specifically address it, if a taxpayer has more than one qualified residence, the taxpayer’s mortgage interest deduction is still limited to the interest on up to $1 million of acquisition debt and up to $100,000 of home equity debt. Owners of two qualifying residences can’t apply the limits separately to each residence.
Charles J. Sophy, et al. v. Commissioner138 TC No. 8
August Tax Tip
The IRS is helping minimize the time spent on the completion of the Free Application for Federal Student Aid (FAFSA) form by automating access to federal tax returns with the IRS Data Retrieval Tool. This tool provides the opportunity for applicants to automatically transfer the required tax data onto the FAFSA form.
