Unmarried co-owners must allocate mortgage interest limits

BY CHARLES J. REICHERT, CPA

The Tax Court held that, in calculating qualified residence interest, unmarried taxpayers must apply the debt limits for home acquisition and home equity loans to their total joint indebtedness on qualified residences rather than to each of their shares of the indebtedness.

Sec. 163(h)(3)(A) permits taxpayers to deduct interest paid or accrued during a tax year on acquisition indebtedness or home equity indebtedness for a qualified residence, which is defined by Sec. 163(h)(4)(A)(i) as the taxpayer’s principal residence and one other home used by the taxpayer as a residence under rules at Sec. 280A(d)(1). Interest may be deducted only on the first $1 million of acquisition indebtedness and $100,000 of home equity indebtedness. In 2009, the IRS Office of Chief Counsel issued Chief Counsel Advice (CCA) 200911007, which stated that when homes are jointly owned by unmarried taxpayers, the limits of Sec. 163(h)(3) should be applied on a per- residence basis, not a per-taxpayer basis.

Charles J. Sophy and Bruce H. Voss purchased a home in Rancho Mirage, Calif., in 2000 and a home in Beverly Hills, Calif., in 2002 as joint tenants, financing each purchase with a mortgage secured by the property. The taxpayers subsequently refinanced both mortgages and obtained a home equity line of credit on the Beverly Hills property. The total average balance for all of the mortgages was $2,703,568 in 2006 and $2,669,136 in 2007. Sophy and Voss each received notices of deficiency on their 2006 and 2007 individual tax returns when the IRS, using the method of CCA 200911007, disallowed portions of their interest deductions because each taxpayer had used $1 million and $100,000 limitations to compute his interest deductions for both years. The taxpayers petitioned the Tax Court for relief.

The taxpayers argued that the debt limitations of Sec. 163(h)(3) should be applied on a per-taxpayer basis when co-owners of the home or homes are not married to each other. The court rejected this argument, stating the statute’s language limits the amount of indebtedness on the home or homes, not the amount of a taxpayer’s indebtedness. The court noted the phrase “of the taxpayer” refers to a residence, not the indebtedness. Furthermore, the court noted, the limitations have been applied to the total qualified residence indebtedness of married co-owners, who, if they file separately, are each allowed half the limitation amounts.

The taxpayers argued, in turn, that when Congress used the half limitations for married persons filing separate returns, it intentionally created a marriage penalty not applicable to co-owners not married to each other. In rejecting this argument, the court stated that the language of the statute and its legislative history did not indicate such an intent.

  • Sophy, 138 T.C. No. 8 (2012)


By Charles J. Reichert, CPA, instructor of accounting, University of Minnesota–Duluth.

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