IRS to allow taxpayers full mortgage interest deduction on co-owned property

Tax Hot Topics: Mortgage interest deduction on co-owned propertyThe IRS announced in an “Action on Decision” in August that it is acquiescing on a recent court decision and allowing taxpayers to deduct interest on up to $1.1 million in mortgage debt even if another taxpayer holds debt on the same property.

Taxpayers can generally deduct interest paid on up to a $1 million in debt used to buy a principal residence and one other home, and another $100,000 in general home equity debt on the properties. Section 163(h)(3)(B) cuts these limits in half for married taxpayers filing separately, but does not otherwise specify whether the limit applies only on a per-taxpayer or also on a per-residence basis.

The IRS successfully argued in the Tax Court in Sophy v. Commissioner, 138 T.C. 204 (2012) that the limitation applies on a per-property basis, so that two unmarried co-owners of two residences were allowed combined interest deductions on only $1.1 million total mortgage debt between the two of them, instead of up to $1.1 million each. But the Ninth Circuit Court of Appeals reversed the decision in Voss v. Commissioner, 796 F.3d 1051 (9th Cir. 2015), allowing each taxpayer to use the full $1.1 million limit.

The IRS has acquiesced to the Ninth Circuit’s decision, meaning it will not challenge unmarried co-owners of properties who each deduct interest on up to $1.1 million in mortgage debt. The ruling follows another recent IRS decision helping taxpayers take the mortgage interest deduction. The IRS ruled in Rev. Rul. 2010-25 that taxpayers could use the additional interest deduction on up to $100,000 in home equity debt even if the debt was “acquisition” debt used to acquire, construct or substantially improve the home.

For more information, please contact Dustin Stamper, +1 202 861 4144.

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