Mortgage Interest Deduction Doubles for Unmarried Cohabitants

Jackie Bedard
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The Internal Revenue Service (IRS) has once again chosen to punish married couples by increasing the so-called "marriage penalty."

Married couples already take a hit on their wallets when it comes to the 28 percent income tax bracket that kicks in at $91,150 for single filers but only at $151,900 for joint filers. Do the math. That's far from double. 

In addition, single taxpayers start to lose 3 percent of itemized deductions after adjusted gross income exceeds $258,250, but married taxpayers begin to lose itemized deductions when gross income exceeds $309,900.

Now, the IRS says it will offer unmarried taxpayers who co-own a home double the mortgage interest deduction available to married taxpayers. This hardly seems fair, but there's little that can be done unless lawmakers amend the current tax code.

An IRS announcement this month comes nearly a full year after the Ninth Circuit Appeals Court overturned a Tax Court decision involving a cohabiting couple who each sought a deduction on $1.1 million of acquisition and home equity debt. 

Mortgage Interest Deductions 101

Section 163(h)(3) of the U.S. tax code allows filers a deduction for qualified residence interest on up to $1 million of acquisition indebtedness and $100,000 of home equity indebtedness. 

If a taxpayer's mortgage balance (or balances on up to two homes) exceeds the statutory limitations, then the interest deduction is limited to the amount applicable to only $1.1 million worth of debt.

Voss v. Commissioner (Voss, CA-9, 8/7/15)

The unmarried couple, in this case, Bruce Voss and Charles Sophy, bought homes as joint tenants in 2000 in Beverly hills and Rancho Mirage, Calif., according to the Journal of Accountancy. They financed the Beverly Hills home with a $2 million mortgage and took out a $300,000 home equity line of credit on it. They financed the Rancho Mirage home for $500,000. 

It is important to note that same-sex marriage was not legal in California at the time, and the two men were domestic partners. Voss and Sophy later filed separate federal income tax returns for 2006 and 2007, each claiming amounts of mortgage interest indebtedness up to the $1.1 million limit. The IRS disallowed a portion of those deductions on each filer's return, deciding that they were jointly subject to the Sec. 163(h)(3) limit. In turn, Voss and Sophy filed a Tax Court petition, and the cases were consolidated. The Tax Court upheld the IRS's action.

However, the Ninth Circuit said that rules on interest limitations apply on a per-taxpayer basis, rather than a per-residence basis. It also said if Congress had intended for debt limits to apply on a per-residence basis, it could have included such language in the tax code. 

With the IRS's acquiescence to the appellate court, Voss and Sophy can collectively write off interest on a total of $2.2 million of debt. This now opens the door for other unmarried couples in similar situations. 

We hope this information is useful to you and helps you and your families. If you have a specific case or a question, please don't hesitate to call our office at 919-443-3035.
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