Each unmarried taxpayer who shares ownership of a home is allowed to deduct one dollar of mortgage interest. After the IRS agreed to the Ninth Circuit’s decision in Voss, 796 F, the debt included $1 million in acquisition and home equity debt. 3d 1051 (9th Cir. 2015). In overturning the Tax Court’s ruling in Sophy, 138 T, the Ninth Circuit C. 204 (2012) found that rather than “per-residence,” the mortgage interest limitation is intended to apply on a “per-taxpayer” basis.
In 2000, Charles J. Sophy and Bruce H. Voss purchased a house together in Rancho Mirage, Calif. , and obtained a mortgage secured by the Rancho Mirage home to pay for the purchase. Together, Sophy and Voss bought a home in Beverly Hills, California, in 2002. which they paid for by taking out a mortgage on a home in Beverly Hills During the relevant years, they held both homes as joint tenants after purchasing them as joint tenants. They lived in the Rancho Mirage house as their secondary residence and the Beverly Hills house as their primary residence.
Sophy and Voss paid $94,698 and $85,962 in mortgage interest respectively in 2006, and $99,901 and $76,635 in interest in 2007. The Beverly Hills mortgage, home equity loan, and Rancho Mirage mortgage had total average balances of $2,703,568 and $2,669,136, respectively, in 2006 and 2007. On his federal income tax returns from 2006 and 2007, Sophy deducted qualified residence interest to the tune of $95,396 and $65,614, respectively. On his tax returns from 2006 and 2007, Voss deducted $95,396 and $88,268 respectively.
Parts of their mortgage interest deductions were disallowed by the IRS after auditing their individual income tax returns for 2006 and 2007, claiming that their deductions exceeded the Internal Revenue Code’s allowable limits.
Prior to the Tax Cuts and Jobs Act, the limit for mortgage interest deduction was $1 million. In 2022, however, the limit dropped to $750,000, meaning that this tax year, married couples filing together and single filers can deduct the interest as high as $750,000.
IRS Wins in Tax Court
The IRS’s justification for rejecting a portion of Sophy and Voss’ mortgage interest deduction centered on how it interpreted the acquisition indebtedness limitation found in Sec 163(h)(3). The general rule under Sec. No deduction is permitted for the payment of personal interest, according to section 163(h)(1). However, Sec. The phrase “qualified residence interest,” as used in Section 163(h)(2), is an exception. 163(h)(3).
Any interest that is paid or accrued on “acquisition” or “home equity” debt with regard to a qualified residence during the tax year is referred to as qualified residence interest. Any debt that is incurred for the purpose of purchasing, building, or significantly improving a qualified residence and is secured by that residence is referred to as acquisition debt. There are limits on how much a taxpayer can classify as acquisition debt. For any period, the total amount that can be used as acquisition debt cannot exceed $1 million (or $500,000 in the case of a married person filing a separate return).
Any debt that is secured by a qualified residence (other than acquisition debt) and whose aggregate amount does not exceed the residence’s value less the amount of acquisition debt is referred to as home equity debt. Furthermore, there are restrictions on how much debt the taxpayer may count as home equity debt. For any given period, the total amount that can be considered as home equity debt cannot exceed $100,000 (or $50,000 in the case of a married person filing a separate return).
The IRS acknowledged that both residences satisfied the criteria for a qualified residence and that the mortgage interest paid by Sophy and Voss qualified as residence interest because it was paid on debt incurred for the purchase of the residences and debt secured by their equity.
The sole issue in dispute was whether the debt restrictions outlined in Section It should be decided whether to apply 163(h)(3) “per-residence” or “per-taxpayer” According to the IRS’ interpretation of the law (and in line with its justification in Chief Counsel Advice 200911007), the limitations should be applied “per-residence.” This reasoning led the IRS to conclude that each taxpayer, as a joint owner of the homes, was qualified for a deduction for his pro rata share of the interest he paid on $1. 1 million of debt secured by each house. However, Sophy and Voss argued that the restrictions should be applied “per-taxpayer” and that since they filed as single taxpayers, they should each be able to deduct interest on $1 of their tax liability. debt, for a total of $2 in acquisition and home equity debt. 1 million in debt. 2 million.
The Tax Court relied on the repeated use of the words “with respect to any qualified residence” and “with respect to such residence” in the definition of “qualified residence interest” under Sec. 163(h)(3), concluding that Congress was “residence focused” rather than “taxpayer focused” when drafting the statute. The court reasoned that the statute’s parenthetical language, which lowers the limits on acquisition and home equity debt to $500,000 and $50,000, respectively, for married people filing separate returns, implies, “without expressly stating,” that married co-owners are restricted to $1 million. 1 million of aggregate acquisition and home-equity indebtedness.
The provisions for married co-owners filing separately, according to Sophy and Voss, are an attempt by Congress to impose a “marriage penalty,” and they shouldn’t be applied to unmarried co-owners. This argument, however, did not persuade the Tax Court, which already reached its “per-residence” conclusion based on all of the “residence-focused” language in the statute and no other references to a specific taxpayer. It was noted that while unmarried co-owners are free to select their own method of allocating the limitation amounts, the language addressing married co-owners appeared to specify an allocation method for married individuals filing separate returns (e g. , based on relative ownership percentage).
Ninth Circuit Weighs In
The Ninth Circuit acknowledged the difficulty of Sec. A different interpretation of the statute was reached by 163, who stated that “it requires attention to definitions within definitions and exceptions upon exceptions.” Referring to the debt limit provisions in Sec. “[A]lthough the statute is silent as to unmarried co-owners, we infer from the statute’s treatment of married people filing separate returns that [Sec. 163(h)(3)] applies to unmarried co-owners,” the court ruled. [The debt limits under Section 163(h)(3) apply to unmarried co-owners on a per-taxpayer basis. The Ninth Circuit highlighted the language Congress used in the parenthetical of Section in reaching this conclusion. Different debt limits apply to married taxpayers filing separately under section 163(h)(3). “Congress’ use of the phrase in the case of is important,” the court ruled. First, it implies that the parentheticals contain a deviation from the main clause’s general debt ceiling rather than a description of how it should be applied. According to the Ninth Circuit, Congress could have easily changed the language in the parenthetical to read “in the case of any qualified residence of a married individual filing a separate return” if it had been clearly “residence-focused.” “.
Interestingly, the court also reasoned that the parenthetical language not only expresses itself in terms specific to each taxpayer, but also functions specifically for each taxpayer. The court added that the parentheticals give each separately filing spouse a separate debt limit of $550,000 so that when the two spouses combined they would each be entitled to a $1 million dollar judgment. 1 million is the maximum amount of debt that one taxpayer is permitted to have. Any additional language imposing a one-half limitation on married couples who file separately would be unnecessary if the limitation were in fact applied on a per-residence basis. However, if the $1. The limiting language has a purpose because it prevents married couples who file separately from deducting interest on $2 million because it applies on a per-taxpayer basis. 2 million in debt, receiving twice as much help as a married couple filing jointly.
In its Action on Decision 2016-02, the IRS announced in August that it would apply the Secs in a manner similar to that of the Ninth Circuit. per-taxpayer 163(h)(2) and (3) limitations, allowing each unmarried taxpayer to deduct interest on up to $1. 1 million of debt on a qualified residence.
The controversy in this case serves as yet another illustration of the Code’s inherent complexity, as noted by the Ninth Circuit, where extremely intelligent people can interpret a tax statute that is not entirely clear in ways that have radically different effects. Although the IRS’s acceptance of the Ninth Circuit’s decision will be mitigated by recent Supreme Court decisions and the ensuing publication of Treasury regulations requiring legally married same-sex couples to file as married couples, the Services’ compliance offers a much-appreciated gift to unmarried taxpayers who co-own a home.
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FAQ
Is there a limit on how much mortgage interest you can deduct?
loans taken out to purchase a primary residence or a second home, including refinanced loans Important guidelines and exceptions: For single taxpayers, the maximum deduction is $750,000; for married couples filing separately, it is $375,000.
Can you write off 100% of mortgage interest?
Up to $1,000,000 in mortgage debt can be written off by taxpayers as a deduction for interest ($500,000 if married and filing separately). Over this amount, no interest on first or second mortgages is tax deductible.
When did 750000 mortgage limitation start?
Prior to 2018, there was a $1 million cap on the amount of debt that could be written off. The maximum amount of debt is $750,000 starting in 2018. Mortgages that were in existence as of December 15, 2017, will continue to be taxed in accordance with the previous regulations.