IRS Advises How Part Owners Handle $1 Million Mortgage Deduction Limit


The IRS Office of Chief Counsel has issued a memorandum outlining how partial owners of a principal residence with a mortgage bigger than $1 million should handle their mortgage deduction (CCA 200911007).

 

Under IRC § 163(h)(3), taxpayers can deduct interest paid on certain mortgages and home equity loans, but the Code limits the deduction to interest on the first $1 million of indebtedness on a mortgage used to purchase a home. (The limit on home equity indebtedness is $100,000.)

 

Where two taxpayers jointly own a principal residence with a mortgage larger than $1 million, the question has arisen as to how the $1 million limitation should apply. Should the limitation apply to each taxpayer separately? Should married taxpayers filing jointly be treated as one taxpayer or two?

 

The Service explicitly rejects applying the $1 million to each taxpayer and says that the limit applies to the total combined amount of indebtedness on the home. The IRS looked at the language of the Code section, which refers to the total “acquisition indebtedness” on the residence, not the amount owed by a particular taxpayer.

 

The memorandum supplies a formula for figuring each taxpayer’s amount of qualified residence interest: multiply the amount of interest paid by the taxpayer by a fraction—$1 million divided by the amount of the mortgage.

 

This formula has the effect of dividing the limit between the taxpayers based on the portion of the interest that they pay (which may or may not reflect their percentages of ownership). The memorandum does not explicitly address the case of married joint owners, but does note that under section 163(h)(3)(B)(ii), the limit is reduced to $500,000 for a married taxpayer filing a separate return.

 

SPONSORED REPORT

Keeping client information safe in an age of scams and security threats

A look at the Dirty Dozen tax scams and ways to protect taxpayer information.

TECHNOLOGY Q&A

How to create maps in Excel 2016

Microsoft Excel 2016 has two new mapping capabilities. J. Carlton Collins, CPA, demonstrates how to make masterful 2D and 3D maps in Excel 2016.

QUIZ

News quiz: IRS enforcement, a hot job, and audit value

The IRS’s 2016 Data Book, a “hot job” of particular interest at this time of year, and insight into how executive and audit committees view the insights from financial statement audits received attention recently. See how much you know with this short quiz.