Wednesday, April 11, 2012

Unmarried co-owners must apply single mortgage interest limit

Doeren Mayhew 
Unmarried co-owners must apply single mortgage interest limit

The Tax Court has found that two unmarried co-owners of two California properties cannot each individually deduct the interest paid on their personal residence indebtedness.  The debt limitations are based on the number of residences, rather than the number of taxpayers.

The Internal Revenue Code provides that for married individuals filing separate returns, the debt limits are $550,000 per taxpayer.  The court viewed this treatment as also applying to two unmarried homeowners. As a result, the two unmarried taxpayers before the Tax Court together were allowed only a total of $1.1 million of debt on which mortgage interest payments for the year would be properly claimed itemized deductions ($1 million of acquisition indebtedness and $100,000 of home equity indebtedness).

Court sides with IRS
Siding with the IRS, the court found that the debt limits (totaling $1.1 million) applied based collectively per residence. The court rejected the taxpayers claim that, for unmarried taxpayers, the debt limits applied per taxpayer.  Relying on what it found to be the plain language of the statute, Code Sec. 163(h)(3), the court noted that the references to acquisition debt or home equity debt applied with respect to any qualified residence of the taxpayer (emphasis added). The references to indebtedness were not qualified by references to individual taxpayers. Thus, it appeared that Congress intended to apply the debt limits to the indebtedness on a residence, not to each taxpayer liable for debt on the residence.

The Tax Court's decision may negatively impact domestic couples and partners who jointly own property. The court was adamant that the debt limits applied per residence, and rejected the taxpayers' claims that they could deduct interest on $2.2 million of debt because they were unmarried.

Doeren Mayhew is a Michigan Financial Firm located in Troy, MI.

If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

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