Most taxpayers are aware that the mortgage interest deduction is limited to $1 million of acquisition indebtedness and $100,000 of home equity indebtedness on a qualified residence. These limitations apply to a single taxpayer or married taxpayers who jointly file their tax return. In the case of a married couple filing separately, the limitations are $500,000 of acquisition debt and $50,000 of home equity debt for each spouse.
Taxpayers Bruce Voss and Charles Sophy, who were not married to each other, bought two houses together. They both acquired the houses as joint tenants and held the properties as joint tenants during the years at issue. They financed the purchases by obtaining a mortgage that was secured by each house. They also obtained a home equity line of credit for one of the houses. They were jointly and severally liable on the mortgage and home equity debt. They used one of the houses as their principal residence and the other as their second residence. Each filed their tax returns separately as a single taxpayer and took the mortgage interest deductions based on the $1.1 million limitations.
The IRS audited their tax returns and disallowed the limitations on the mortgage interest deductions. The IRS determined that Voss and Sophy, as co-owners of the two residences, were limited to deducting interest of $1 million of acquisition indebtedness and $100,000 of home equity indebtedness. The IRS contended that mortgage interest expense limitations were properly applied on a per-residence basis, regardless of the number of residence owners and the marital status of the co-owners. Namely, co-owners, who aren’t married, are collectively limited to a deduction for interest paid on a maximum of $1.1 million on the acquisition and home equity indebtedness.
Voss and Sophy disagreed and sued in Tax Court. Initially, the Tax Court ruled in favor of the IRS, but the taxpayers appealed to the Court of Appeals for the Ninth Circuit.
The Court of Appeals for the Ninth Circuit overturned the Tax Court’s decision and allowed the unmarried co-owners to each deduct the mortgage interest on the $1.1 million of acquisition and home equity indebtedness.
The IRS has recently announced its acquiescence in the Ninth Circuit holding in Voss vs. Commissioner that mortgage interest limitations are applied on a per-individual basis, rather than a per-residence basis. And, for those inclined, the courts’ decision-making in its entirety is can be found here.
Some commentators have remarked that this has worsened the marriage penalty by offering an incentive for unmarried taxpayers who co-own a home by doubling the mortgage interest deduction limitations.
About Jennie Tieu (Senior Manager, GHJ)
Jennie Tieu has over eleven years of experience in public accounting providing tax services to partnerships, limited liability companies, corporations and high-net-worth individuals. Her experience includes Like-Kind Exchange Transactions, multi-state tax compliance and representing clients before federal and state taxing authorities. She earned her bachelor’s degree in accounting from California State University, Northridge and has her CPA license from California Board of Accountancy.
Her personal interests include spending time with her husband and daughter, traveling and experiencing foods from various cultures.